Markel Group Inc. (MKL) Earnings Call Transcript & Summary

Hi, everybody. Thank all for an excellent and dynamic session there. Who knew that swans will indeed become quite so popular? I think we concluded at a very healthy level of optimism among the group. And for the avoidance of doubt, despite our negative outlook on the sector, we're certainly not expecting a new suite of CEOs next time we host this event next year. So just in terms of a couple of key insights, we did see the call for government potential, but the need for government backstops when linked to pandemic risk. We also saw the fact that there are some, indeed, some high barriers to entry, both from an infrastructure and capital quantum perspective. There was a stark reminder on the pressures from the investment environment and really the fact that single-digit ROEs are just [ simply not ] acceptable. So we will shortly be moving to our second panel of the day. I'd like to pull up a polling question, please. So if you could pull up the second polling question. So what is your expectation for the 2021 global property and casualty reinsurance target pricing change? This did get some discussion clearly with COVID as somewhat of a tailwind from the speakers in the last panel. So please pick your options. We will reveal the results at the end of the next panel, just leads me to introduce Hardeep Manku for the next, one of our senior analyst based in Toronto. Hardeep, over to you.

Thank you, Simon, and good morning, and welcome to the panel of the reinsurance value chain. My name is Hardeep Manku, and I'm a property-casualty -- part of the property-casualty group in Toronto covering the reinsurance sector. To discuss the impact of recent events on pricing, reinsurance placement strategies and [indiscernible] evolution of the insurance value chain, I'm today joined by Julia Chu, who's the Chief Risk Officer of Markel Corp.; Bryon Ehrhart, Global Head of Strategic Growth & Development and Global Chairman of Capital Advisory and Reinsurance Solutions at Aon; and Justin O'Keefe, Senior Vice President and Chief Underwriting Officer of the Property Business at RenaissanceRe Holdings. Justin, Bryon and Julia, thank you so much for joining us today. When we look at the insurance value chain, the number of talents has shifted to the large brokers and cedents. But the market dynamics are changing, especially when you look at the -- more recently, the pandemic outbreak over the last couple of years, natural catastrophes, which include wildfires in terms of the losses, which nobody anticipated, at least, in 2018. [indiscernible] capital, some of claims in Florida [indiscernible] U.S. city trends. Bryon, if I can, start with -- to get your preface on the state of the reinsurance value chain, how well it has worked. And in general, what is your view in terms of how the value propositions of some of the key stakeholders like brokers, cedents and reinsurance changing if I can get your thoughts on that.

Sure. Great. Hopefully, you can hear me okay?

Yes, we can hear you good.

Well, I think, first, with some of the volatility recently, I think it's easy to focus on loss events and maybe some of the shortcomings and continuity of capacity in general. But if I look across the last 10 -- 5 or 10 years, our clients still value reinsurance capital very highly. And the cost of that capital is well inside the cost of insurance companies' cost of capital. So we measure it and a ceded return on equity or ceded ROE perspective would be a -- probably see that between 2% and 8%, depending on the type of cover in terms of the replacement cost of that reinsurance with capital. The reinsurance capital cost 2% to 8%, maybe trending somewhat higher over the last 3 renewal periods, but it's still a very accretive capital and it's working. So the value chain of brokers and reinsurers and clients is producing good value, really good value, for insurance companies. So I expect that to continue. Reasonably sophisticated industry, heavy-duty quantitative modeling, both on the ceding side and the reinsurer side, and we've made that balance work on both sides to produce these accretive results.

Go ahead, yes. Sorry, I thought you are trying to say something. Julia, if I can get your thoughts. Over the last 2 years, Markel's reinsurance have [indiscernible] when you're looking at reinsurance programs, what exactly are your expectations from the reinsurance and brokers?

Well, first of all, Hardeep, [indiscernible]. Thank you for inviting me here on behalf of Markel. It's a great question. On the value what I look for from our brokers and reinsurers are they recognize, Markel, the value of insurance underwriting. And it's really proven in the last couple of years how we changed our reinsurance strategy to think about how do we consolidate and simplify and to move from a volatility of earnings protection to really a capital protection. The reinsurers have been narrowed down to a few core panels that really believe in our underwriting, investing with us on our long-term profitability. And often compared, this is we changed our strategy from buying a few pairs of really good-looking shoes to really paying our mortgage bills, so we have next year to invest in the future of Markel.

Justin, if I can get your thoughts. Over this couple of years, when we look at the reinsurance sector, it has been tough for reinsurance. It has faced secular trends. And Julia just pointed one of them in terms of consolidation of panels. You have had influx of alternative capital, granted it had stalled a little bit over the last 18 months or so. And there has been market consolidation in general. So how is RenaissanceRe approaching the evolving landscape and maintaining its value proposition?

Thanks, Hardeep. Really, I need to take a step back within a couple of years. It's going back almost 10 years ago. When RenRe was really still operating as a [indiscernible]- based specialist majority being in the property cat space, we're looking to the future and very strategically made the decision that companies will consolidate. Companies will be looking for bigger, larger scale reinsurers to do business with -- across multiple regions, multiple lines. They'll consolidate their buying. They'll get better at their risk management, generally, enterprise risk management across-the-board. Julia is a great example for that and what Markel has done with their ceded reinsurance buying. And so that really put us on the journey to build the company of what Renaissance is today, which is have scale, is global, is multiplying, has a combination of our owned kind of public equity capital as well as one of the largest partner capital management businesses in the world. And I think you need all of that to succeed. Sometimes there is the basis just stepping back saying what -- how to be important to your clients and your brokers? We talk about value chain and discussions like this, I think that there's still a lot of opportunities within the value chain because the fact of the matter is there's a lot of lost value in that chain. Aon has been very public with this, Bryon, in particular, over a decade-plus about the value of a broker, either a retail side or reinsurance side. The value has evolved over time. The value for someone like a RenaissanceRe that we add to someone like Markel, as an example, that has evolved over time. And so I just look at how we've positioned ourselves, I think, as a reinsurer of the future where you're writing over $5 billion of premium, total capital under management, including our owned and partner, about $18 billion. And we're doing it with 600 people. We couldn't do that without having brokers like Aon and the others out there helping us even more during that process.

Picking up on that theme in terms of the broker market, so when we look at the distribution in most of the markets, it is dominated by brokers. Whereas in certain other markets, the markets do lean towards the direct channel. Recently, we've also observed that even well-known direct players have been looking to tap into the broker market. So definitely, there is value in the broker markets. And different markets behave a little differently as well. But Bryon, if I can get your thoughts in terms of some of the dynamics that we're seeing more recently as well.

Yes. So the dynamics recently have been -- what have we learned from [indiscernible] of them. We, as brokers need to present programs that makes sense to both sides of the transaction. So the modeling that we do, where we're looking at revised estimates of frequency and severity for all kinds of different events around the world is really important work. I look at what we did post World Trade Center with terrorism, something we can think about frequency and think about security. We really couldn't think about frequency. California wildfires in the last few years have really been a topic for us as brokers to represent our clients, really rethinking like what is frequency. We have been able to think about severity there. What's changing frequency, is it climate change? Is it other things? We don't really know. There is plenty of experience now to fight into and really think about what the future of that business looks like. This is not new to brokers. This is what we do, create markets. I joined Aon 2 weeks after the Northridge earthquake, about 16 months after Andrew. And the first 10 years of my career was building capacity so that our clients could trade catastrophe risk in the marketplace. In the last 10 or so, we've been trying to find out how we can remain relevant, not just in cat and casualty and other things, but areas where our clients want or need to innovate to remain more relevant to large, medium and small insurers where their needs have grown exponentially with the growth of GDP, where, the insurance history as a percentage of GDP, at least in the United States, is about maybe half where it should have been and half of where it has been historically.

Julia, any thoughts on that, the same question?

Sure. Echoing Bryon's sentiment, at Markel, we truly believe matching the right risk, the right capital most efficiently is the future of the insurance industry and successful companies. The direct market has its place of providing a proper commodity type of insurance product to the customers. However, in markets such like reinsurance, it really needed differentiated solution. We -- at Markel, it would be very hard for us to just approach a direct market to purchase reinsurance as protection. For example, the type of reinsurance that's gone direct, typically a much smaller typical quarter here is pro rata. But a shift of our reinsurance strategy in the last few years has been more agri cover like stop losses and tend to be more sophisticated and need to be modeled and packaged well together to go to the reinsurers. Broker play an important role in that and middle tier.

Just staying with you and just switching gears a little bit in terms of capital and Bryon mentioned the cost of capital at about 2% to 8% and reinsurance has been really helpful. But alternative capacity is -- has been there as well to kind of support some of that cost of capital as well. But the alternative capital capacity is constrained the last 12, 18 months and the recent concerns around pandemic had just exacerbated concerns. In terms of the capacity, how is that impacting capital structures in reinsurance programs in general?

Very interesting question. Okay, I would say the answer differ based on the type of company who are purchasing reinsurance, utilizing reinsurance as part of the capital. I can only speak for Markel. So if I use Markel as example, we think reinsurance is part of capital structure. But reinsurance is most efficient for us to protect the volatility on a short-term basis, such as like retro, group agri cover and we have been utilizing quite a bit of those in the last few years. The impact of the constraint ILS is more on the pricing side. So we have experienced price increases in the retro cover. But it's not a capacity issue. So also the property retro and property agri cover, ILS does not really have a large [ influence ] in the [ cash-based ] liability, which is definitely the majority [indiscernible] purchased forward. So on the -- we're still looking forward to traditional players, such like then and how to write the balance sheet, that we do not feel the same constraints of the ILS side.

Justin, if I can pose the same question to you and I have a follow-up as well just given RenRe's platform, which is designed to manage third-party capital as well. But let me start with getting your thoughts on the same question.

Can you repeat the question again? Sorry, Hardeep.

Sure. Just on the constrained capacity within the alternative capital space, be it that in reinsurance or retrocession. How has that impacted the reinsurance programs?

Yes. I'll tell you a lot more on January 1, I think. We haven't seen really a material constraint yet. I think a lot of the arrows are pointing in that direction for reasons we can go to more detail on with historical losses. I think one of the items is, at RenRe, we talk about our partner capital versus the third-party capital, and I think that in and of itself, there's a lot in there. There's been a lot of asset managers that are incentivized differently than others. And so what we're seeing right now is not necessarily a constraint on capital, but we're seeing capital flowing into different managers.

And just in here, Hardeep, I think Justin has been entirely modest as he usually is. I would just say that as the oldest member of this panel that the lessons that we're seeing in alternative capital are just the same that you've seen in reinsurance over my entire career, which is reinsurance doing the right thing. Reinsurance really starts with who are you reinsuring and who are you broking the business for? And it turns out it matters a lot. So when you see the hardening in mainly retro, it's very hard to actually have transparency on who you reinsure there. And if you're going to do it, you want to do it with people that actually know [ a lot about the ] business. And I think when you're looking at 2 great panelists here with Markel and with Renaissance, and in Renaissance cases, it's clear, when we're talking to investors about people that actually know what the underlying business would look like, if you want to begin the alternative capital space, RenRe is a long-term winner. Markel has its own version of winning through the ILS space by acquiring one of the leading managers in the space. So if you want to really -- if you want to invest in the space, [indiscernible] have learned, reinsure and then if you don't have enough of yourself as an investor, who do you partner with, and you've got 2 good partners on this panel for investors. And they've proven it over time that, that trend will just continue, maybe even accelerate.

Right. And Bryon, I can just tease that outlook a little bit in terms of what you highlighted and Justin as well. And looking at the comments from the previous panel, which kind of highlighted in terms of different nature of investors that are acquiring the capital for [indiscernible] capital. Some of that may be more transactional as well. So from that perspective, does it make more sense in terms of having -- are the interest of cedents best served, I guess, if the alternative capital has access to maybe companies like RenaissanceRe, which know how to -- have built the platform around managing third-party capital?

Well, I guess I'm not -- I wouldn't say that their strength is knowing how to manage the alternative capital, it's just that they have the relationships and help an investor with the transparency that's needed to accumulate exposure that they want, which is going to be diversifying from equity market returns and interest rate-sensitive product that they otherwise have choices to invest in on [ asset management part ], I think, to me sounds special about Markel and Ren and others is that they actually know the client. They know what kind of client they are reinsuring. And I think these relationships are not formed in a couple of years, these are over careers. And that insight as, it turns out, is valuable.

Sure. And Justin, your thoughts?

Is that to me, Hardeep? Sorry.

Yes. Sorry. So just basically trying to get your thoughts as well. So over the last 1.5 years, as we have seen trapped capital, but the coverage issues as well and reserves have been raised. And then obviously, that created an issue on 2020 cat losses [indiscernible]. So the question is more in terms of these interests are best served if they are testing alternative capital companies like RenaissanceRe.

Well, I'm a bit biased. I think there is a lot of value in a one-stop shop, right, and scale really does matter, both in the partner capital management as well as just the general reinsurance business. Our clients want long-term consistency. Price, they want price efficiency, no doubt about it. But they want it back by the ability and willingness to pay people that they've done -- or businesses that they've done business with for decades. So when the black swan comes, as was mentioned in the previous panel, there's understanding in the sort of relationship and the trading partnership when there's tough conversations, which may actually be continuing. I would expect a lot of tough conversations in this business over the next few years mostly due to COVID. So it's important. I mean we have a huge alignment with our third-party capital. And a lot of that is just a [ holder ] in a sense, we take a piece of the pie along with them. We have a proprietary view of risk. We have views on climate change. We don't disagree with vendor modeling output. That's really helpful. If you're an investor trying to invest in the ILS space, in the cat management space, understanding different views of risk out there and looking forward versus backwards maybe and trying to figure out what -- how to price business really. So those are really our key focus. If you look back at our capital management strategy, I think when the majority of managers were taking money into the system 5 years ago, we were not. That was not an easy thing for us to do as a management team because the more you take in, we do make some fees on that. But we did not feel that was the right time and place to do that. Now [ pole ] position, I think we're in a position of strength as we go into the core January 1 renewal, especially in the collateralized retrocession and just general cat space where we're in a position of strength. We have capital and we're [ deploying that ].

And Julia, just staying on the topic. And Markel has a number of businesses in insurance, reinsurance and alternative capital as well, including Nephila. And everyone highlighted the strengths of Markel as well. And Markel recently did shift the way it manages its property cat insurance business as well. So just want to get your thoughts in terms of the insights on the shift, and in general, how you're basically matching risk to capital given the various sources of capital that are available to Markel?

Good question, Hardeep. This strategic shift we made recently is really to fully leverage Markel's market-leading competitive position in the property catastrophe market while generating operational efficiency within Markel. And this is a way we think about how we're most efficiently matching risk with capital and -- which is demonstrating the property cat market. Nephila's balance sheet is properly matched with the property cat volatility and risk of capital as opposed to using our own balance sheet property cat reinsurance [indiscernible] for that.

Julia, just staying with alternative capital just if I can get your thoughts over the last -- we have seen last 3 years since 2017, alternative capital has suffered losses. You have seen assignment of benefit issues in Florida and [ track ] capital internally. And now there is potential risk of this interruption possibly, which is another risk that's [ laying ] on. So when we're thinking about the investors that are providing this capital, are they losing confidence in the catastrophe model, and in general, just the sector's ability to comprehend and manage these risks?

Some are, some are not. Again, it kind of goes back to the point of how they've been managed within their own organizations and by the asset managers. The fact of the matter is, I mean, everything -- it's not that there were those events, it's the fact that the investors have lost money, right? When you really get down to it, they've lost money and they've been surprised how they've lost money. They've lost money because of wildfires that they didn't know maybe even existed, the exposure to the portfolio. They've lost money because of storms like Irma were 2x the size of any vendor model suggested that a hazard event that makes you produce. They are now concerned about uncertainty around completely -- probably -- certainly unmodeled and potentially supposedly uncovered losses from COVID. And so all of this uncertainty and surprise has really created a lack of confidence by some investors into the system. And we have not even begun to see how that really plays out. We will see a lot of that over the next 2 months as we get into January 1.

Bryon, can I get your thoughts on the same question as well.

[ In order to repeat ], I think out of the points that Justin covered, I think let's just say the models themselves have got some realignment with some of the experience that's happened. But I'd also say that things that are probably never going to be able to be modeled well are things like operational excellence amongst our clients. We've seen in the Florida events and also in the California events the ability to field a full claim staff for the size of those catastrophic events has been meaningful in terms of the outcomes in terms of variance to the model expected results. And so I've been proud to look at clients we represent in the market who really differentiated themselves in terms of how much creep do we have and why do we have that creep. Is it lawyer intimidation in Florida and an inability to control that? Or have you been able to mitigate it with true relationships with the original insurers? And that relationship is formed by actually having an adequate number of people on the ground following these events. We're really starting to see that kind of differentiation, and then traditional reinsurers are able to make those differentiations. And as they think about who is it best to reinsure in the business, who are we reinsuring first in [indiscernible] underwriting and then understanding why that client is different than others. And you're seeing, I think, some differentiation coming through, not just in the future renewal periods. But I think in June and July of this past year, we saw real differentiation in outcomes for clients that had those operational levels of excellence. And those that didn't had tougher times. We still got programs. But those are harder and harder to do. But clients are reacting, right? The message from reinsurers about the loss creep has been heard by clients and they are making operational changes to make these things better.

And Hardeep, if you don't mind, if I could just follow up on that quickly. I mean what Bryon has really just gotten through very eloquently as usual is basically underwriting's back. It's more than just a model output. It's more than just a few numbers in the spreadsheet.

Yes. No. Those are good points, Bryon. Just it seems there has been alignment of alternative capital behind strong managers. And similarly, there has been a trend from reinsurers to place more emphasis on the cedents that have good underwriting and claims management practices as well. Julia, just as Markel has all these platforms, including alternative capital, just want to get your thoughts as well in terms of how you have seen alternative capital realigning in view of some of these issues.

Yes. Definitely. What we really believe is we -- the thing what our panel is about, value of the insurance and reinsurance value chain and having different capabilities and different platform, we have ability to provide the [ branded ] solution to cedents either using our own balance sheet or the ILS balance sheet are using [ purely fronting ]. And people are looking for unique solutions, so they can bring the risk capital most efficiently and most quickly, especially in rate environment we're experiencing right now.

Just moving a little bit in terms of more recent experience in Florida, where given the events of the past couple of years, one would have expected a higher demand for tail protection yet we have seen lower coverages, lower reinsurance purchases. And clearly, assignment of benefit issue has been front and center over the last 2 years or so. What needs to be done to make this market more efficient? Bryon, if I can start with you.

Great. I think the -- just to be clear, the AOB legislation that passed is very helpful. However, it didn't apply to Irma, and Irma claims are continuing to develop for many people because the statute that was passed just doesn't apply. So the ability to respond to a legal environment like this is just something that we, I think, as an industry, have learned. First, our clients, of course, are seeing the devastating impact as it continues to roll through their retention, scope participations and their reinsurance programs in a way that looks the predictable with that desire to maintain a relationship with their reinsurers. Of course, as I've mentioned in the prior question, there are highly variable outcomes. Those that managed it in a way that they are less able to be intimidated or they had better operational excellence to field teams who actually could sell these claims early and they have not seen tremendous reopening of these claims, that's an important piece. But I think going back to Florida, California and any of these loss-stricken areas, I think that our clients simply look for legislative facility, the ability to make rates that understand, in the end, [ it's just as cost for the ] business. You add up the expected losses and there's some margin for the volatility that's there and the expenses that are paid to agents along the way. Florida specifically acknowledges the cost of reinsurance and allows it to be final, California does not. So we will continue to evolve. And usually these statutes change with loss occurrences and company failures. And you're going to see -- well, you have seen that in both instances in California and Florida. So this is not new to us. It's a process everybody on this panel has been at for a long time. And these are the things we help our clients through. In Markel's case, they help insurers, right? In our case, we help insurers who want to buy reinsurance and Justin's team absolutely answers the bell and bring in capacities needed to continue to strip that volatility and free up capital at accretive terms.

Justin, same question to you. Obviously, we've seen reinsurance being more selective with the risk in Florida market as well. But just from your perspective, how do you see this market developing and the steps that are needed to make it more efficient?

Yes. I mean, Florida has always had its challenges. Every year, it's something new. I actually kind of view it in the current situation, Florida insurers are under [ attack more than ever ] just losses. If you look at the 10 years of essentially primary rate decreases is a huge deal partly because of the efficiency of reinsurance capital and alternative capital [indiscernible] at risk [indiscernible] perfectly. My job was to have the most efficient pricing available for our clients and our brokers. And so I think RenRe and others in the market did that. The issue, what happened, was outside of our control. And a lot of that has to do with AOB, which I'll just I'll call fraud to put it bluntly within the system. So whether that's claims adjusters, public adjusters, different -- plaintiffs attorneys, et cetera, the companies really are having the difficulty surviving within that kind of culture politically, which is in Florida. And so it's difficult. I actually didn't see less buying at June 1. We thought companies bought approximately the same as they would have. We did have to reposition our portfolio. I do have some concerns that the smaller capital-wise companies, no pun intended, but are just going to have more and more difficulty weathering the storm and taking multiple retentions, given that they're also battling lawyers on the ground from still Irma and Michael as well as daily water claims. So it is not easy. We'll do our best to support the brokers and clients as we can, but we also have to look out for our capital and make sure we're putting it to work where it's best suited.

Julia can I get your thoughts on that question as well?

Sure. I have to say in Florida, we have minimal exposure from Markel's balance sheet perspective after exiting the property cat reinsurance. So [indiscernible] my personal feeling is more institutional issue of the why are we allowing people to be building on a closed area that really shouldn't be building and not charging them adequate rates between -- for the insurance and having a burden shifted to the reinsurance or ILS market. And this is not really a long-term strategy.

Just switching gears a bit in terms of talking about a little bit more about the pandemic, and we heard quite a bit in terms of the immediate and the long-term impact. I just want to get your thoughts of when you look at the COVID-19 outbreak, how is it impacting the insurance and reinsurance market? Julia, can we get your thoughts and then we'll get other panelists to opine as well.

Sure. I will work on the impact in a few areas. The first area is really the low interest rate environment is here to stay. So the ability to generate underwriting profit is going to be [ a pain ] going forward. So that's one major impact. Markel has really benefited from that area for the reason we have our [ actual belief ] underwriting is an art, is a science and we truly -- we need to underwrite profitability and not relying on investment income. So that's number one. Second thing is we're looking for price correction. For last few years a lot of losses didn't come in and they are not capital impact, but [ they don't like ] like earnings impact. And everybody is looking for price increases, why we're seeing 20%, 30% price increases [ at the ] industry to really adjust the loss cost inflation that can come in. But definitely, Markel has great [ underwriting ] profitability again. So we are really writing a tidal wave of rate increase going forward. So we feel very comfortable with our underwriting portfolio, focusing on the insurance product, and going forward, bringing our insurance [ but why is ] cost of capital everything is going up, including reinsurance. Therefore, the hard cost is really here to stay for at least a couple more years. So that's how I would summarize the overall impact of COVID. It brought really the opportunities within our insurance/reinsurance market.

And we'll touch on the pricing a little bit more in some time as well, so I'll come back to you on that. Bryon, here, if I can get your thoughts on this topic as well. In general, how are you seeing the insurance/reinsurance markets coping up and changing in response to the outbreak.

Well, the U.S. exposure has been -- you had some exceptions, but in general, you've seen there are still -- various pandemic exclusions work very effectively. The core system is aligning around the view that our clients had, which is this is not a covered event. It's not our first time to think about these things. We've underwritten them and then excluded them. Nothing -- there's really no way to cover it with private capital. I think the events-related losses where they specifically covered pandemic are paying without question. The industry is performing in the way they expected. There are some pieces where travel and other things that were specifically covered have been producing some losses that are above and beyond what people expected given the premium levels in those industries. But these are things that can be fixed. I don't think anyone reasonably could have told you that the entire world would shut down the way that it did. So it's not that the frequency and severity models before really hadn't thought about pandemic where it was covered. It's just that I don't think anybody thought the entire world would agree to shut down in the way it did. I think that the acceleration that Julia mentioned in terms of the pricing for E&S is COVID has allowed a level of uncertainty creep into C-level executives and underwriting shops. And that uncertainty had the exponent attached, which is maybe pricing ahead and kept up with loss cost for the last 5 or 6 years before, particularly in excess casualty lines, EPLI, et cetera. And in certain cases, it's just certain phases that need to produce litigation are driving trends higher than what pricing had kept up. So COVID has, like World Trade Center did, brought the opportunity to align the industry about being a little bit more risk-off. And when you're a little bit more risk-off and you still -- people still want to cover, you have the ability to move price. So that's just until capacity is there. And I think prior panel mentioned the really important component there, which is people are much more judicious in how they use limits. Having single carriers doing $20 million, $30 million and even $50 million limit is relatively unheard of today. They're more comfortable in the $5 million, $10 million and $15 million area and that's bringing opportunity for rethinking how much capital is needed in the industry. I see a lot of that capital that is coming in the industry being specifically in the E&S space, and that seems to me well .

Justin, your thoughts and also if I can get your views in terms of the claims that you're getting from cedents, obviously, have different experience in terms of the geographic region. They have been, as we heard from the previous panel, business introduction claims are more prevalent in Europe, outside of U.S., not so much in the U.S. But just in general, as you see the impact from COVID and some of these things, claims may develop over a period of time, how are you dealing with that?

Yes. The previous panel covered this in quite a bit of detail and same with Bryon and Julia. I mean, the obvious ones, the event cancellation, which we call kind of bucket one. I think the bigger impact here is just the recessionary impact, which almost, in way, could have been -- it could have been anything, not necessary pandemic. So the recessionary impact on credit lines and then the influence of that with the economy on the lower investment yields we talked about in the absolute impairment now who make -- operate an underwriting profit in the system. So this is kind of [indiscernible] we're seeing some [indiscernible] come out of Europe continent and U.K. and we're watching still -- I still think is a certainty in the U.S. regarding [ BI ] and others. Those are the kind of known and unknowns, if you will. I do think it's going to go on for years, not just property, but certainly the casualty lines. I think it's probably a bit naive to think that something this big, that the plaintiffs' bar is not going to put a lot of time, energy and effort in for years to come and so we're all going to be dealing with this. There's issues around just expenses of claims management and how does that flow to assurers and/or reinsurers over time. This is a big expense item, I think, for all of us to need to deal with, hire more people, spend more time thinking about it internally and externally. And just keep reminding ourselves that this is still a live cat. And I'm sure a year from now, we're going to look back and there's going to be some unintended consequence still that come out of the system. And I think directly impact to the cat space as we look to hear at January 1. It's a big retrocessional renewal for property, about 80% of the market renews at January 1. About half of that is collateralized, doesn't have paper sit in front of it. There's a big portion of that, that would be on an all-peril basis versus a named peril-specific earthquake or cyclone, hurricane cover. That is going to be really interesting to see over the next 2 months, some shakeup for that. protection for certainty when they have uncertainty or losses. And I think it's going to be just really interesting next couple of months to see how much, if any, of this collateral is released back to investors.

And just in terms of your comments on how the discussions will go in -- prior to the 1/1 renewal. And when we look at the last [ few years, everything ] is increasing. It has been increasing more moderately before the pandemic and it has accelerated that trend for sure. But when we look at the [ last few years ], it wasn't as smooth sailing for sure. So from your perspective, how do the discussions amongst brokers and reinsurers shaping up leading up to 1/1 renewal cycle?

Without getting into a lot of specifics, I think generally for the first time in a long time, both brokers and clients are willing to accept almost on all lines, all geographies that there are pricing terms and conditions that are going to be more beneficial to reinsurer, assuming the reinsurer hasn't changed their risk-adjusted view of risk, which is a big assumption. So I think people have conceded, buyers have conceded that pricing and terms need to change. I think the good news is that this is a general statement, but most of our clients are receiving very healthy rate increases across multiple lines of business. And so I think that is actually the most critical part [indiscernible] with our current partners, with our clients that we can work with them on that business and ride the wave with them as more prices generated through the system.

Bryon, same question. Just over the past 2 cycles, obviously, the markets moved fairly quickly as well. So as you're looking at 1/1 renewal in terms of just the nature of the discussions that are happening today just to prepare the ground for the rate change or the terms and conditions as you're looking at the market dynamics?

Yes. Well, I think a little bit of this has been mentioned before in my comments that experience matters. And the way we set these relationships between cedents and reinsurers is really based on a view of the business model of the -- not just the transaction, but the entire relationship amongst all treaties. But where we have specific treaties with performance issues, we need to learn together as partners what really have learned together, what is the underwriting basis that we have, a discrete level pricing for our clients and what they're getting from their insurers. And what are they changing in the way they view that risk. And that oftentimes seem like Julia will have a conversation with Justin about what each side is doing, and there's a good opportunity for unity there. And I would -- as I mentioned in prior answers, there's great differentiation amongst -- for reinsurance amongst the clients when they see those clients actually doing the right thing on the street, learning from frequency and handle on -- contain some of the volatility and the uncertainty through contract terms on the insurance policy, et cetera, and making sure the rates that they're getting reflects the risk. And when that's true, the reinsurance has to compete with other forms of capital, it does so, as I said in the first question, very effectively.

Julia, just in terms of looking at Markel, there's a big insurance program and you're a big buyer of reinsurers as well. And in the past year, at least you were less bullish on the reinsurance pricing. Obviously, things from a sector environment has shifted a lot over the last 10 to 12 months. So just looking forward in terms of how you're having your discussions with reinsurers when it comes to rate increases and in terms and conditions.

Yes. I would say our renewal discussion with reinsurers are going really well, especially with the [indiscernible] system with excellent broker market. And that's one of the reasons why we use broker because they understand us, they understand our value proposition, they have much better package and market what we do and understand the market what they want to sell. I think the difference is there are places with large rate increases and there are places with lower rate increases. It's less about rate increases, I think. A reinsurer that I'm thinking about, it's more about rate return adequacy, what return [indiscernible] for various different line of business and am I diversifying in my portfolio, am I expecting to earn a return? The first year [ versus ] 5 years from now is am I trapping my capital because a casualty business versus am I deploying them for the property side. We are very comfortable with our insurance underwriting and we are -- we've been shifting, as we have -- we've been talking about, the reinsurer's value to really protect more tail balance sheet capital, less about earnings. So we almost never used a [indiscernible] reinsurance. Well, the reason is [ inefficient ] for us and when we look for reinsurance partners, we look at people who understand where we're looking to buy reinsurance [indiscernible] providing capital and volatility reduction to us, what would pay a high price for those products, but we also expect reinsurance panels and partners to really fully understand how we underwrite and how profitable we are, how consistent we are.

Before we move further, just want to bring up the polling results for the sentiment on the pricing change that we conducted just at the start of the panel. Can we have the polling results, please? All right. So the market definitely is leaning towards greater rate changes. Majority of the audience seems to be in the greater than 5% range, which is a fairly strong sentiment. So just looking at the polling results, Justin, if I can start with you, do you agree with the audience sentiment on the aggregate price change for 2021? And if there is a momentum, how long do you think it can sustain?

Yes. My first reaction, I think when I saw the first graph after the [indiscernible] the top range was like 5% to 8% or 8% to 10% and that hasn't seem to move already in a week. So I guess that's a good sign. There's one thing I've learned about this business is it's hard to predict what the market is going to do even a month out. So I guess I'll just do be a reinsurer in this one and play a little Price Is Right and I'll go on the top end and say 10-point something will be my marker for the Price Is Right. But like I said before, I mean the trends are almost all lines, all regions, the pricing is at a positive.

Right. And just a quick follow-up on that. Just -- we talked about volatility and rate adequacy, do we -- do you think that the rate increases that are coming to the sector are sufficient given the uncertainty at least that we see from the outright?

Yes. I think it all depends on how you manage your portfolio. What's your mix of your business? What's your gross-to-net strategy? How are you managing your portfolio is how we think about it. And we felt that we've been able to put together a very attractive portfolio each year over the past 10 years, which has arguably been a soft market. So I fully expect going in what I think is going to be a better market for the owners of risk next year. We're going to be able to put together a very attractive portfolio.

Okay. Bryon, your thoughts on the pricing sentiment as somebody who has to broker the 2 sides together and bring the pricing in?

Yes. Sure. And the cover is all property and casualty. So I think, of course, the upper end, it's very aggressive if you're including property and casualty. I think property loss experience will probably see some of the higher increases. But I think casualty, it's possible given the strength of the underlying results that while Markel doesn't buy proportionally, a lot of our clients do on the lines that are strongly impacted. And you could actually see that the cost of reinsurance, given the pricing that's there, it might look like it's going up. And ceding commissions and other features in the contracts can be worked so that it remains an accretive source of capital for our clients. It's, as we mentioned before, it's a tremendously dynamic market in excess casualty, D&O, E&O and EPLI. The commercial [indiscernible] other things that pricing is very strong in these areas, flow of business is a very strong away from admitted markets that are, as we said, are being more judicious with their limits and that is headed into E&S market that is playing to the benefit of a place like, in my view, are Markel and a number of other E&S-focused clients. So it's reinsurers have been long partners with them and have had good results. The results without contract modifications might actually be far exceeding what insurers even [ turn up ] in those cases. So it's a dynamic. And as I mentioned before, we are at the center of a relationship between long-standing partners on both sides, and those economics have to work across the entire spectrum for them. And as I mentioned in my first response to the first question today, we have been working and we expect it to continue to work very accretively for our clients.

Julia, your sentiment on the rate increases.

Sure. So this is where I put my actual hat. So if you think about reinsurance industry in the past few years, let's say they had 100% combined ratio. That's [ quite ] generous. But they are looking for high single-digit return right now, they probably need about 10% rate increases to bring a combined ratio from 100% to 90%, assuming [ financial dollar ] capital. And I think that's what people want to see is the rate increases in the reinsurance on the [ over ] portfolio is about 10% up minimum. But the balance is they are really competing with the insurer ceded own cost of capital. So for example, if I [indiscernible] Markel, if the cost of reinsurance is going up to be double digit -- high double digit and my question is should I just be to my balance sheet versus buying more reinsurance. And so I would think the end result would be probably closer to 5% to 8% [indiscernible] rate increases.

We have a couple of minutes remaining for the poll. Let me go to the audience and pick up some of the questions from there. And one of the questions coming in, and this is something the first panel highlighted in terms of the return on equity, which consensus seems to be somewhere in the 7% to 9% or a little bit higher than that, but obviously single digits still. Question is how do insurance companies, and I will put reinsurance companies in there as well, aim to tackle the rising cost of equity given all the volatility that exists today. Justin, if I can start with you and then I'll get to Bryon and Julia piece as well on that.

I apologize, Hardeep. Can you say that again or ask the question just so. I missed the last point.

Sure. How do insurance company aim to tackle the cost of -- rising cost of equity?

Yes. Well, there's a lot of -- hopefully, you have levers to pull. If you think about -- back in early June, RenRe, we issued public equity, nondeal-related public equity issuance and insurance/reinsurance business in the past 10 years. And so the way we look at it, and Julia mentioned this earlier, our job is to back risk with efficient capital. We're constantly looking at the various forms of capital and we felt that back midyear for various reasons in equity was the most efficient way for unraised capital improve our kind of spread of cost of capital over our overall expected returns. That's different for each organization, different capital equity-to-debt structures and how they manage even their ceded reinsurance and/or retrocessional programs. And so we knew that as a very fluid thing. And I think we're just fortunate that we have multiple levers to pull within our system on a public and private basis, debt and equity basis, et cetera. That is a constant review within our organization.

Bryon, do you have any thoughts?

Julia?

Thanks, Bryon. Sure. Good question really from the audience. [indiscernible] cost of equity means we are required to generate better returns for our shareholders. And with Markel, this is how we think about it, it is the best new dollar of return. Is that using absolute capital or it's generating fee business, having the capability of both ILS fund manager and state national fronting carrier. The return we're generating from them will not require us to deploy the equity capital to support that new dollar of return we're generating. As opposed to the risk-bearing side on insurance side, [indiscernible] the best operating environment we have seen. So we are happy to deploy capital to be supporting that. That has to be definitely superior return. And ability to have provide -- unique solutions to properly officially met risk of capital, therefore, we have a better return for shareholder equity is how we think about the future.

Bryon, any last thoughts.

Yes. I don't think I have anything really to add to Justin or Julia's comments other than I think in the back of our client's mind still is the left-hand side of the balance sheet has a lot of stimulus effect in it. So we saw 7 or 8 days between when the lockdown happened and when stimulus came from the Federal Reserve and the Treasury and the corporate credit spreads widened 2 to 5x, depending on where you were in a $75 trillion corporate debt market. Insurers will love that. I think in addition to the items that Julia and Justin mentioned, our clients are still thinking that there's some volatility first and nobody else when it is to occur other than it will be again after a vaccine exists that's effective.

Thank you. With that, we come to the end of the panel, we are almost out of time. Julia, Bryon and Justin, thank you so much for sharing your valuable insights with us today. And thank you to the audience for joining us. With that, I will hand it back to my colleague, Simon Ashworth in London for closing comments. Thank you.

Thank you.