S&P Global Inc. (SPGI) Earnings Call Transcript & Summary

Hello, everyone, and welcome to today's webinar. My name is Lynn Bachstetter. I'm the Head of the Global Financial Institutions Group here at Market Intelligence, and I will be your moderator today on our 2022 outlook and trends for the U.S. insurance space. It is and I think I say this every time it's one of my favorite events as we bring 3 divisions of S&P together to talk about topical issues in this space. So we will have representatives from Ratings, Index and Market Intelligence. We recognize today's topic is of great interest to you. So we do want to get started. However, I do want to go through a few housekeeping items. The first will be that we want to make this a live session. So I have some prepared questions for the panelists. However, please utilize the Q&A widget throughout the session to ask additional questions. We're going to hope to devote about the last 10 to 15 minutes to go through those questions. Now if we don't have time to get through all of them, you have the e-mails of our panelists, and they also can contact you directly. But we want to try to get through as many as possible. Also, at the conclusion of this, we will be sending out a survey or it will also be available through the survey widget. This really helps us shape for what we want to do for future events. So we really appreciate your feedback. It's a very quick survey. So anything that you could do to add additional insight would be greatly appreciated. And also, we will be sending a replay in the event that you want to send this to your colleague or want to revisit something that had been said that will usually come out in about 24 to 48 hours after the conclusion of this call. If you encounter any technical difficulties, you could also utilize that Q&A widget, fingers crossed that we don't have that. But we have someone online on the tech side that will be able to help you in case of sounds or connection or anything like that. So please utilize that widget as well. So let's talk about our panelist and who we will be speaking to you today. I just briefly want to say that, unfortunately, Carmi Margalit from Ratings is unwell. He's okay, but he is unable to join us today. But rest assured, we have a great hour of topics and discussions that we will go through. So I want to introduce John Iten. He is a Senior Director and Property/Casualty Insurance Sector Lead in the North American Financial Services group at S&P Global Ratings. He leads the group's research, commentary and investor outreach efforts on P&C insurance. He also has primary analytical responsibility for a portfolio of high-profile property/casualty insurers. And prior to his current role, John led a team of credit analysts within Nonlife Insurance responsible for a portfolio of North American property/casualty, multiline, title and bond insurers. Tim Zawacki is a principal research analyst covering the U.S. insurance industry for S&P Global Market Intelligence. He has covered the insurance industry in various capacities since joining what was SNL Financial in 1999. He is based in Charlottesville, same office that annual U.S. P&C Market Report, U.S. Life and Annuity Market Report, and various other thought leadership pieces providing historical context and forward-looking outlooks regarding key industry trends and developments at the line of business level. Raghu Ramachandran is the Head of the Insurance Asset Channel at S&P Dow Jones Indices. In this role, he's responsible for applying S&P DJI resources to solve problems for insurance companies. Raghu works on how indices are used to create innovative products for insurance companies, benchmarking general account portfolios and the use of ETFs by insurance companies. I just want to quickly give one plug. A lot of this information that I also shared in the bio regarding white papers and research, there also is a resource widget, which includes the outlook for ratings both on P&C and life, some of Tim Zawacki's articles as well as some from Raghu and Index. So at the conclusion of the call, I highly suggest utilizing and going to that to see if there's any articles of interest to you.

So let's first start with John. John, to put you in the spotlight. Maybe you could start off. I think it's great to kind of level set this even and quickly get a view from an S&P Global Ratings perspective, what is your current outlook for the P&C space?

Sure, Lynn. Thanks. The outlook for the US P/C primary sector remains stable. It's been that way now for a number of years. And I think it's back stopped by -- if you look at the distribution of our ratings outlook, it's pretty clear why we have a stable outlook. 86% of our ratings currently have stable outlooks. And there are only about 11% that have negative outlooks. There have been no rating changes so far this year. But we did remove AIG and its P/C operations where we had them at CreditWatch negative. We did this following the S-1 filing that they did recently for the IPO of its life and retirement business, which has been renamed Corebridge. And however, we did assign a negative outlook to the P/C ratings following that removal. The other action of note, we did place the rating of RSUI on CreditWatch positive that followed the announcement that its parent, Alleghany Corp is -- had agreed to be acquired by Berkshire Hathaway. Looking at the subcomponents, the commercial lines writers continue to benefit from a strong pricing environment and just about all lines with the exception really of workers comp. And while the rate of increase has been slowly declining since late in 2020, the companies in the sector continue to get good rate increases that are exceeding loss cost trend. So margins are still expanding at least in the commercial line side. On personal lines, last year was a bit of a surprise. Of course, the spike in materials and labor costs that we saw in the middle -- start in the middle of last year, certainly, caught insurers off guard. It led to a deterioration, of course, in underwriting results. And insures, the personal lines insurers, responded by seeking approval for rate increases and these have begun to flow through their P&Ls, but it will take time for rates to catch up with loss cost trends. And insurers, it will take time to get back to the level of profitability that they target. But they do benefit from the fact that these are short-tail lines. They can react fairly quickly to changes in loss costs with rate increases. And of course, they can also adjust their underwriting appetite and manage their exposure that way. We're still in the middle of first quarter earnings season, but the same trends are still in place. The companies that we rate that report on a GAAP basis, so far, we've gotten about half of those in. The combined ratio, the average combined ratio, and it's just a simple average but -- was impressive. It was 4 points lower than the first quarter of last year. It went from -- down to 89%, at least for that subset of companies, on average. The main factor behind the improvement was a sharp reduction in cat losses that really accounted for most of the improvement. And if you look back and think about what happened last year in the first quarter, the Texas winter storms, it's -- there was nothing like that this year. So bottom line is the industry is off to a very good start in 2022. And seeing that many companies below 90% is pretty impressive. Just looking at capital markets activity, like everybody else, I think we expect to slow down, at least in the number of issues this year, debt issues and hybrid issues. But there have been a couple of very large issues so far this year that changed that mix a little bit. AIG, in particular, issued $6.5 billion of senior notes as part of its capital restructuring in preparation for its IPO of Corebridge. And Progressive also had a significant issue of $1.5 billion of notes. So in total, there's been around $8.5 billion so far this year, and that's over 2/3 of the amount that was issued in all last year, which was a little over $11 billion. So a bit of an anomaly there, but we do, in term -- for the rest of the year, we wouldn't expect to see much activity. Lynn, I'll turn it back over to you.

Thank you for that. Let's talk about the topic of inflation. So kind of what if there are some spikes in the rates? And maybe we'll give John some time to take a little bit of a breather. So Tim, I'm going to kick it over to you if you could potentially get us started on your views around that topic. And maybe if you want to give both like a life and P&C perspective.

Sure. So the macroeconomic backdrop is certainly an interesting one as we look at both of these sectors. Low interest rates have challenged both P&C and life companies for a very long time and has particularly been an issue on the life side, and that's led to some transformational decision-making by the likes of principal and prudential and several other prominent life and annuity companies to really restructure their balance sheets and to rely more heavily on the use of reinsurance to address some of these older liabilities that were written at a time of higher interest rates. So I think in terms of transformational side of things on the life side and then on the P&C side, when you think about rising interest rates, the bigger concern, I think is -- and John hit on this is the role that inflation has played not just in the short-tail lines as we think about economic inflation, things like used car prices and so forth, we'll talk about that more later. But the issue of social inflation is still out there and looming and really driving the actions of commercial lines companies with long-tail books of business to drive price increases. Premium growth was exceptionally strong last year, which is the combination of both a roaring economy as the U.S. bounced back from the depths of the pandemic, but also strong rate increases that the carriers have been able to push through in order to make sure that they are adequately compensated for the risks that they're taking on with respect to social inflation. When we think about social inflation, it's the idea of the potential for large jury awards to come up and really surprise companies that may have expected lower levels of average claims and less frequent large claims in their longer-tail casualty books. This is an issue that I think the combined ratios that John mentioned of late has maybe been on the back burner in terms of actually impacting the income statements of some of the casualty writers, but it's certainly something that remains very much top of mind. Through the first quarter earnings calls that have happened so far, all the companies that are engaged in long-tail casualty business continue to warn that social inflation has not gone away that a lot of the favorable results that we've seen of late, maybe just a result of some of the delayed court dockets as a result of the pandemic. We did an inflation webinar 2 months ago and put out some statistics then just looking at how significant the court closures and postponements were in some key federal and state courts. So this is something that continues to loom out there for the industry and will continue to drive carriers to push for rate increases. I would also say on the P&C side that the industry has really been, due to these very low interest rates, compelled to write at an underwriting profit. There is no margin for error when it comes to underwriting in a 0 or near 0 interest rate environment. Now that we see the 10-year backup over 3%, the question immediately become as well maybe some of that discipline lost. With inflation in the backdrop, certainly, carriers don't have that option taken off in unpredictable ways, the supply chain issues that are affected by decisions by the Chinese government to shutdown cities and other various activities around the world related to pandemic and global conflict from a geopolitical standpoint. These events are really out of the industry's hands and are very difficult to predict. So we would expect this level of caution to persist and really reinforce the notion of underwriting discipline even as interest rates begin to rise and money is put to work at higher yields.

Great. Thank you. Raghu, can you comment a little bit potentially what if there is a spike in just from where you sit within Index, your view on overall inflation and impact to insurance portfolios.

So Tim talked a little bit about the impact of inflation on the claims side. I want to talk a little bit about the impact of inflation on the investment side. So one aspect of that is as interest rates go up, the value of bonds go down. We've seen the treasuries have gone up to 2.81% or so -- or 2.89%. And then on top of that, there's a spread between the risk retreasury rate and what companies are investing in. That's gone up another 50 basis points. So on an average insurance portfolio, that could mean you've had possibly up to a 10% loss in market value of the bonds just based on duration and change in interest movements. So that's obviously an impact for insurance companies. The other aspect from an investment sense is the real value -- or the real yield on the bond. So I looked up this morning, 10 years, we were at 2.89%. 10-year breakeven was at 2.81%, right? So you're saying that inflation is not keeping up with how much you need to adjust for it. So you're earning more money on the new money that's coming in, but inflation is eating away somewhat of what Tim has talked about. And then there's also the cost involved in operations of the company that will also go up to the operating expenses with also go up. So insurance companies are already challenged by low rates. This is not a good situation for them to be in.

Thanks. John, do you have anything to add? If not, I thought maybe we could talk a little bit about specific lines of businesses and the impact the inflation may have on them. But do you have any general comments to add?

No, I think Tim pretty well covered it. The -- I guess it's worth pointing out that the S&P economists, at least the Ratings on the rating side is still forecasting a decline at CPI -- core CPI this year at 5.2% on average over the whole year. But going back down to around 2% in 2023 and 2024. So hopefully, that's the scenario that plays out. But if inflation stays high, then I completely agree with the points that Tim and Raghu have already made.

Great. Thank you. Tim, if you don't mind, let's shift a little bit and talk about as a follow-up to this discussion, what about annuities and the impact with that line of business and potentially high rates.

Sure. So I think what we saw over the course of the pandemic was really some considerable volatility in terms of sales trends. You really saw a lot of the major annuity companies sort of shut down in the second quarter of 2020 just due to the extreme volatility in the financial markets, uncertainty as to the impact of the massive central bank infusions that were coming into the economy and the various government support programs that being were passed through Congress. Then we saw sort of a rebound as the second half of 2020 went along from the depths of the second quarter. Fast forward to 2021, and even though rates remain quite low, we saw a remarkable increase in sales of products like the registered index-linked annuities performed very well. Companies that may be pulled back from the fixed index annuity market. We're back in the market and generating some considerable momentum and some very impressive growth rates off of very low levels of 2020. The amount of growth that took place in 2021 was historically high, some of the highest growth rates we've seen in the past 2 decades. So that obviously sets a very high bar as we look ahead to 2022. So even as companies develop products that may be a little bit more aggressive from a crediting rate standpoint and a product design standpoint relative to an ultra-low interest rate environment and the sorts of products that we were seeing in the market during that period. It will be challenging to generate the kind of growth that we saw last year, just given that the bar was set so high. So I think that we would continue to expect the RILA product to continue to generate strong sales. And I think some of the activity that we're seeing is supported by the flow reinsurance agreements. We've seen several very sizable flow reinsurance agreements between traditional annuity companies and the private equity linked reinsurers, and we'll talk more about that issue as our program continues today, but those flow reinsurance agreements provide capacity for the primary annuity companies to write significant amounts of business, generally sort of a risk-sharing function where a portion of this -- the risk associated with certain types of annuities will be ceded under the flow reinsurance agreement. So that's a development that we've seen really gained momentum over the last 12 months and something that probably will support sales activities in addition to just sort of this rising tide of higher rates and the amount of, I don't know, aggressiveness is the right word, but perhaps broader breadth of product in the marketplace that address many retirement needs that are out there among consumers. And then, of course, you have to look at the group annuity business and pension risk transfer, and that's been a very active market. It's something that has attracted some more political and regulatory attention here in the last few months, particularly as the number of companies that are active in pension risk transfer continues to grow. This is something that flows into the group annuity business, typically a single premium group annuity issued as part of these pension risk transfer transactions. There's been some calls to revisit some of this guidance regarding fiduciary standards that's been in place for more than 25 years. It was a much different market when the Department of Labor put in its guidance as to those fiduciary standards back in 1995 and the types of transactions that were occurring or are different than those. There are mostly pension closeout kinds of transactions as opposed to these pension risk transfer deals that have become very popular over the last decade. So those are -- I think that's something that's really going to help. The growth and continued expansion of the number of carriers that are active in that marketplace are really going to determine how quickly the overall life and annuity business grows in 2022.

Excellent. Thank you.

Lynn, I mean if I could just add one point. Earlier this month, I finally built to travel and visit clients. One of the things we heard was that there's now actually interest in having cost of living writers adding on policies to handle the inflation.

Sorry, Raghu, you broke up towards the end. You said cost of living.

Cost of living writers that are being added to annuity policies to handle the inflation.

Great. Thank you. And Tim, just to stick with you for one last comment about lines of business and shifting gears to P&C. Let's talk a little bit about the impact on auto rate actions. In particular, I think we all have sensed this on used cars.

Yes. So the -- I think when we think back to where we were at this time last year and where we've ended up, it's quite remarkable. I don't think anyone was really anticipating the stickiness of the high used car prices. The Manheim Used Vehicle Index is something that many carriers watch closely. And it began to rise in the summer of 2020 as we sort of emerged from the pandemic and people were getting out and about again. It really began to take off in the summer and fall of 2021 due to all these supply chain shortages that are affecting the supply of new vehicles in the marketplace. So you had situations where used vehicle valuations were incredibly high, and it obviously impacts average claim costs and impacts severity, especially when you have a situation where you have a vehicle that's a total loss after an accident. Those costs are increasing quarter after quarter. Companies have indicated that even though the Manheim Index has peaked at least in terms of a near-term peak back in January that the impact on their actual reported severity isn't -- tends to come in on a lag, so that it might be several months after January where the worst of these used car price spikes really hit the books in some cases. If you think back to where we were in May of 2021, it was really a situation where companies were attempting to gauge how quickly frequency will return back to normal. And we've seen frequency get back very close to normal in some circumstances. It really is a geographical story just depending on the nature of individual markets, the amount of people that may be still working from home as opposed to going on a commute to the office and that sort of thing. And as companies, I think as they are filing rates today, as John mentioned, with rate increases in mind to address this increasing claim severity, I think there's still an assumption in many cases that we're not quite back to 2019 levels in terms of expectations for frequency, but the severity is just so overwhelming not just in terms of inflation but also in terms of the fatality statistics. Motor vehicle fatalities are back at levels that we saw 15 years ago. And that's kind of an alarming statistic when you think about all the safety technologies that have been introduced into the U.S. vehicle fleet over the last 15 years. So the idea that this long-term trend line towards safer roads, safer vehicles has really been turned on its face here during the pandemic and whether that's because fewer crashes are happening during commutes, which you would expect be at lower speeds and more are happening at higher speeds or if there are other factors at work, I think that remains to be seen, but it's something that I think supports this notion of the need for additional rate, not just because of inflation but because of what other -- that more severe crashes are occurring, which obviously results in higher claims.

What we're expecting with AOCI in the upcoming weeks?

Sorry about that. Lynda, absolutely. There -- we're expecting -- there was a pretty dramatic impact last year from the rise in interest rates. That was the -- again, this is just focused on companies that report on a GAAP basis since there really is no impact on the statutory filers. But the -- for full year 2021, there was that group of companies that we rate. There was about a $20 billion decline in AOCI driven by the rise in rates, which pretty much offset earnings for the year and shareholders' equity was essentially flat for or that group of companies in aggregate. For the ones that have reported so far, it looks like it's certainly not a good story. The -- in the first quarter, that subgroup of companies that have reported show another $12 billion decline in their AOCI. They've swung from a $3 billion net gain position at year-end to a $9 billion loss position. So $12 billion in just the 3 months, though it was a pretty dramatic quarter for rate increases. And that flowed and in terms of shareholders' equity, the shareholders' equity for the group was down 7%. So despite a pretty outstanding underwriting performance for the quarter, the -- at least in the short term here, the AOCI has more than offset that and resulted in that decline in shareholders' equity. So it's a bit too early to say that capital adequacy of the companies we rate is going to be substantially impacted. We'll see what happens with rates the rest of the year. Fortunately, the industry is -- the P/C industry and the life industry for that matter, capital adequacy is a relative strength to the vast majority of the ratings. So there definitely is some capacity for absorbing this type of decline. And also, it's worth noting, too, that we do have a forward-looking view of capital adequacy. So we would also be looking at what we think is going to happen to earnings and shareholders' equity and by extension, total adjusted capital over this year and in the subsequent 2 years. So it's not a huge concern at this point, but it's something that is definitely worth watching and we're keeping an eye on.

Great. Thanks for that comment. Raghu, I know that we mentioned in your bio your analysis of ETF usage within insurance portfolios. And I know that with the data that came through, you're working on your annual paper. Can you give us a preview as to what you're seeing, what kind of trends you're seeing?

Yes, certainly. So we'll publish that paper in 3 weeks from tomorrow and then we'll have another webinar on that the day after. So I'd say like putting out 3 aspects of it. So the AUM of ETFs invested by insurance companies rose by 15%. It's up at $45 billion at the moment. The insurance companies also added $1.5 billion into ETFs. The interesting part of that is they moved in $3.5 billion into fixed income and took out $1.5 billion from equities, which is interesting in that historically, insurance companies had used equity ETFs and have been slow into coming to use fixed income ETFs. So it seems like they're getting more comfortable with fixed income ETFs. And then one other aspect, I think, that's interesting is the trading volume of ETFs. So last year, insurance companies traded $63 billion of ETFs overall. That is sort of flat from the prior year year. What I think is interesting is if we look at it in terms of Schedule B parts 3, 4 and 5, the buys and sells have increased, but the amount of single year turnover, so Part D, which is bought and sold in a year, that number decreased. So there's less churn in the portfolio than were in past years.

Thank you. And I was just looking at some of the questions. I want to weave in one of the questions that came through the audience, Raghu, just while we have you. What trends are you seeing regarding insurers investing in alternative assets such as venture capital, venture debt and private equity?

Yes. So this has been a steady trend since the global financial crisis, and it's probably picked up more steam in the recent years. With the persistent low rates, what we're seeing is insurance companies moving more assets to BA investments, more illiquid. Really probably not so much venture, but private credit and a little bit private equity just because they have better yield pick up on it. There's also -- driven by the fact that insurance companies don't have an immediate need for liquidity in this. So especially life insurance companies, which have been the bigger players in this, where they're locking up assets for 20 years plus, they have the ability to invest in the private debt securities and they've been doing so in volume.

Thanks. Tim, did you have any additional comments there?

Yes. So just to sort of drive home the point that Raghu was making, we've -- did a deep dive that just posted on Capital IQ Pro today regarding trends and some of these sort of big asset classes that have been, I guess, broadly characterized as less liquid. And Schedule BA was obviously an area of tremendous growth in 2021. The idea there being both affiliated and unaffiliated joint ventures and LLCs, things that would include private equity, venture funds and such, seeing growth in Schedule D, also some significant expansion in areas what's broadly labeled as other loan-backed securities, but think of things like CLOs collateralized loan obligations, asset-backed securities. And then, of course, unaffiliated bank loans, so things like syndicated loans in the leveraged finance space. That's been an area of growth for the industry as well to a lesser extent. And then mortgages, we saw some of the strongest levels of mortgage loan acquisitions that we've ever seen in the second half of 2021. There was a good amount of maturities and disposals. So the net impact in terms of the overall portfolio allocation to mortgages was not nearly as dramatic as the acquisition activity would perhaps suggest. However, we're seeing very strong participation in properties with a residential focus, which I think as we've seen strength in the housing markets and the single-family rental markets would support that kind of investment, multifamily loans are accounting for more and more of the industry's investments and -- as are just straight-out residential mortgages increasing in terms of the allocation there. So -- and on the other hand, we're seeing less allocation relative to history to the office space, which has historically been one of the leading property touch for the life insurance industry. The levels -- the relative amounts of acquisitions in that area were down significantly in 2021. Just given all the uncertainty of that return to work and some of the things we mentioned earlier and talking about private auto, it also, of course, applies to the CRE market. So that -- I think we're -- some of the interesting dynamics that we saw, the low rate environment really pushes companies to consider alternative strategies if they already aren't invested in them, private credit being a significant component and the increasing presence of the alternative asset managers in the space, both as insurance companies themselves, as reinsurers that are managing funds withheld accounts and as unaffiliated third-party asset managers is certainly contributing to that momentum.

Great. And maybe this is somewhat of a segue into the next topic about M&A and maybe in particular what we're seeing for offshoring. But what is your outlook for the PE role on the liability side of the balance sheet? And then it's been a very active couple of years in M&A, especially with large reinsurance transactions, like is there more to that? Is that going to slow down? And I would like to hear John's comment about that as well.

So on the life side, just to speak to some of this private equity-backed reinsurance activity that we've seen. Now M&A in 2021 was at what we would consider to be the highest level in 16 years in the life and annuity space driven by some of these foundational acquisitions by the alternative asset manager. So think of the sale of Allstate Life to Blackstone and Athene becoming part of Apollo. Those were the kinds of transactions that -- and the Brookfield Asset Management's new reinsurance vehicles purchase of American National. These are all very significant transactions and whether or not they get repeated in any shape or form in 2022 is probably unlikely, just given that these foundations have been laid. What we would expect is there to be a very strong block reinsurance transaction activity continuing through 2022. We've already seen it in the first quarter with a number of prominent deals. We saw MassMutual partner with Centerbridge and Hudson Structured Capital Management and others, an entity called Martello Re to reinsure the fixed and indexed annuities that they took on when MassMutual bought Great American Life. There are some transactions that were announced late in 2021 that closed or took effect in 2022, that's going to really move the needle in this space as well. John Hancock had a deal with Venerable that took effect on February 1. And Prudential was in a transaction involving both retail fixed annuity and universal life secondary guarantees business that involved the Cayman Islands affiliate of Talcott Resolution Life. So if you go back 9 years now, Talcott Resolution Life was the former Hartford Life. Sixth Street Partners acquired the company in the summer of last year. And since then, they've been a very active player in this marketplace for block reinsurance deals. And they were the headline on that principal transaction that was announced in the first quarter. So just when you think, well, maybe the well is running a bit dry. There were some very positive comments from Carlyle Group on their earnings call last week, Carlyle just invested more into Fortitude. And Fortitude is expanding into international markets now beyond what it's done in the U.S. with AIG and other counterparties. And very bullish commentary on the deal pipeline in front of Fortitude, which would suggest that this market will only grow larger in 2022 and just based on the activity in the first quarter alone, we're certainly well on the way to that happening.

Yes. And John, I know that in your outlook, you mentioned a little bit some of the transactions that you've been seeing, but are there any other noteworthy ones in the P&C space that maybe you want to spend a little bit more time on your comments. And maybe it's more on the reinsurance side.

Sure. And Tim, there has definitely been some crossover in activity between the P&C sector and the life sector. Particularly last year, a lot of the transactions did involve P/C companies deciding that were -- that had smaller life subsidiaries deciding that the benefits of being a multiline insurer. We're no longer -- they weren't getting adequately compensated for it. I think the pressure from what's going on with the PE firms investing in the life sector. Certainly have probably added to some of the pressure or the impetus to part ways with their life operations. But Tim has already mentioned a couple. Allstate was certainly one. There was, let's say, American Financial, Assurant, small preneed company as well as AIG. These companies all made the decision to exit their life operations. And with the exception of AIG, they've all closed. AIG still in the process of spinning off Corebridge. That was, of course, by far, the largest one. It's interesting the specialization is also -- you've seen it also on the life side, nothing is here so far, but you did have MetLife selling its PC operations, which would have had for a very long time to farmers. That transaction closed last year. And a little before that, you saw Ameriprise sell its PC operations to American family. So there' -- it's interesting there is a lot of overlap there. Strictly on the P&C side, this year, we did see -- we have seen the close of the State Auto acquisition by Liberty Mutual. That was announced last summer, but just closed recently. I'd say the most significant transaction, though, has been the announcement by Berkshire Hathaway that agreed to acquire Alleghany Corp, which owns 2 entities. It owns the Reinsurer Transatlantic Re and it also owns a specialty primary PC operation called RSUI, which is the one that we put on CreditWatch positive. I mentioned that earlier. Reinsurers and specialty lines writers have been favorite acquisition targets over the years. And in this deal, Berkshire Hathaway is actually getting a piece of both to add to their already substantial holdings in those areas. There probably aren't -- there are not a whole lot of targets left. If you look at what's happened over Bermuda consolidation there, it's been pretty dramatic. I guess there's still some reinsurers players, perhaps in the London market that are still talked about as acquisition targets. But -- and the same is true on the specialty line side. The companies that have been acquired over the years, HCC, Philly consolidated. There have been a lot of very strong performing specialty lines writers that have been acquired already. So the selection is getting a little bit thinner, but there's always the possibility of another transaction. And of course, there's always a possibility of a large transformational acquisition, you can't predict those. But we almost saw another one last year when Chubb made an unsolicited bid for Hartford that didn't go through. But once every 5 or 6 years or so, you see something like that happen. But that's nothing on the rise at this point. It is something that we're aware of. So, Lynn, I'll turn it back over to you.

Thank you. Thank you. I do want to devote the last 10 to 15 minutes of live Q&A, I've been trying to weave some of them in. So please, if you have any additional questions if you could submit them on the Q&A widget. We did get some in the beginning when you registered, so we're going to try to get through some of those as well. But we can't -- I can't say this is a topical webcast without hitting the topic of ESG. So there was a question, Raghu, and I'm going to point it to you that says the NAIC recently adopted some new standards around climate disclosure. Can you explain? Raghu, can you hear us?

Right. My neighbor is cutting down trees. So there's a regulation -- the task force for climate disclosures -- Task Force on Climate-related Financial Disclosures in several states, predominantly on the Coast, California, Oregon, New York, Massachusetts, et cetera, have adopted it. It's a 4-part thing, so there's one about setting metrics and targets, one about the risk management around that, setting a strategy for how to manage against the closure and then finally, governance around those policies. And so all these states are now going to start requiring companies to report on those metrics, and it covers roughly 80% of the assets of insurance companies in the U.S. So the insurance companies in the U.S. have to start reporting what European companies have been doing for a long time. And also, we've seen that there's now been more references to at least the E part of ESG in investment policy statements where companies are requiring a certain amount of management of those assets from an environmental perspective.

I don't know if it's just my audio, but it cut out the last comment you made. So just to make sure the audience heard your last sentence if you could regard to take that?

Yes. Sorry. I was talking about that now we're seeing more investment policy statements, including some aspect of environmental management and controlling assets for that in the investment policy statements.

Okay. Tim, I'm going to try to combine a few questions, sticking kind of with climate and specific to the Florida market. Can you talk a little bit about kind of RBC capital requirements and sadly some companies having to shut doors?

Yes. So it's been a difficult couple of years for the Florida market, maybe more than a couple at this point. The big news there is that the situation has grown so dire that beginning the week of May 23, the legislature will be convening a special session to discuss potential legislation to address availability and affordability of property insurance. What we've seen is this is partially a climate story, but it's also partially a social inflation story. I know there are sort of different schools of thought as to what's going on in Florida, whether that meets the classic definition of social inflation or is maybe a bit tangential, but the sort of role of public adjusters and attorneys in litigating claims and pushing for new routes on homes. And just sort of this loss creep from years earlier events such as particularly the Hurricane Irma back in 2017. And so what we've seen is a number of years of reserve strengthening by companies that are focused in that market. And that's caused them to report significant underwriting losses. The governor's office, based on its definition of the Florida insurance industry, has indicated that underwriting losses in the market have exceeded $1 billion for 2 consecutive years. And a lot of that is driven by litigation, whether it's reserving upfront or adjusting prior year reserves for just the volume of litigated claims that the carriers have seen. The response by private companies has been to either shut down altogether to new business or to dramatically restrict the type of new business and renewal business they are writing. So things like homes with older roofs, for example, are finding a very difficult time finding coverage. I was at an event last week where commissioner Altmaier from Florida was speaking. And unfortunately, the situation has really become one of -- is insurance available at any price to some homeowners in the private market in Florida? Ultimately, that means risk gets socialized into the state-run citizens entity, which had been shrinking for a number of years. Barry Gilway came in from Zurich and did a remarkable job, over the course of a decade, in engaging the private market and employing various solutions to shrink the exposure of citizens. And we've seen really a reversal of much of that work here in the last couple of years, and they haven't released policy count statistics yet for April. But given the insolvencies that we've seen in the marketplace, one would expect the trajectory o of citizens growth is going to increase significantly in April and in the coming months. In the absence of a legislative solution that could attract new capital to the market and make existing players more willing to take on some of these risks that they are now avoiding altogether.

Thank you. John, this question is specifically for you, and it's kind of twofold. So I am going to read it, and then if you want me to revisit it, we can. What impact do you think the wildfires in the Southwest will have on the P&C companies? Also, many homeowners have replacement cost coverage and inflation has impacted home costs and the cost of building materials. I don't know if you want to hit the first part about the wildfires.

Yes, that's fine. Similar to what Tim was talking about in the Florida market, I think there's been a similar reaction among P&C companies when you look at what's going on in the California market after several years of wildfires, far in excess of what we've seen historically. You've got -- particularly in areas that are -- the rural areas where homes in recent years have been built, just given the -- what's going on in the California housing market, the affordability issue that's pushed more and more development out into formerly forested areas and now nobody really thought about it too much when it was happening. But now they've got the -- it's definitely on the radar screen of insurers and they're cutting back the raising rates as much as they can. Where they can't raise rates and California is -- does have some fairly strict limits on how much you can increase rates, at least without going through the formal hearing process. So insurers have not been able to get rates to where they think they're being paid adequately, they're cutting back. They're non-renewing in areas where they feel like they've got too much concentration. Also AIG, for instance, got out of the admitted homeowners market all together. They announced that they're in the process of doing so. So like in Florida, more and more risk is being pushed into the residual market to the insurers of last resort. And it's the same story and it's -- that's going to continue as long as the rates -- insurers feel that they can't get the rates that they need to cover that risk, which has, I think, been amply highlighted over the past few years. What was the second part of that question?

Yes. It was speaking about the -- also many homeowners have replacement cost coverage and inflation has impacted home costs and the cost of building materials. I don't know if you...

Yes. Well, to the extent that rates get adjusted for -- one thing that's pushing things up is the cost of housing is going up. So the insured value is going up. And so rates are -- I guess, one benefit would be that rates -- that premiums are going up in response automatically within homeowners policies. And of course, that -- plus the rate increases they're getting or you are helping insurers to try to catch up with the loss cost inflation. But it will take a while for that to really work itself out.

Great. Thank you. For this next one, Raghu, let's start with you and then I think, Tim, if you wanted to add some commentary. Do you expect any significant changes to life insurers investment portfolios now that the NAIC have expanded the C1 categories beyond the former 6 categories?

Yes. So effective this year, it went from 6 to 22 or so, I believe. There's another aspect of it, I think we talked about a little earlier, which is the shift to BA. There's also changes to the capital charge for CLOs and real estate, which I'll let Tim handle. But I think in terms of looking at the public assets at Schedule D Part 1 and 2, I think when you see is one of the aspects is the fact that it makes BBB relatively more attractive than it does the -- sorry, BB more attractive than BBB, so right at the AIG investment-grade split. There's actually a template in Cap IQ that can analyze this and [indiscernible] wrote a paper on this a while back, which we'll try to get into the resource widget for the replay sentiment. And so that's -- you can test that out and see exactly the impact on a particular company or the overall industry.

Yes. And I would just add to that, just looking at some of the data from 2021 and comparing where that -- where investments stood from a long-term bond perspective relative to year-end 2020. The most sizable increases in capital charges were coming at sort of the most junior end of the larger designation. So the A minus part of NAIC 1 and the BBB minus segment of NAIC 2. And what we saw was kind of a couple of interesting developments. We saw some upward migration in the BBB space to the BBB flat from BBB minus. We did not see -- we only saw a negligible movement into the BBB plus category. Now within the NAIC 1, there was some dramatic movement out of AA minus and that was the single most significant move out of any of the new 20 or so new designation categories that the template Raghu talking about kind of captures and the NAIC now signs. The AA minus bonds saw a significant decline and we saw some positive movement into A plus and A flat bonds. So some interesting trends there just in terms of where we saw the increases in investment happen. Now some of that may have to do with individual asset classes and at what might be available, and I think might warrant some further investigation on our part just to see what it was that's triggering such a sizable decline at that AA minus level.

Thank you. Go ahead, Raghu.

Yes. Just one quick point. This is something we've talked about at prior webinars, which is that over the course of the financial crisis, we've seen a migration down in credit, just because if interest rates are lower, companies were leveraging their portfolio. So half of investment grade now is BBB. So you're just sort of naturally going to end up investing in that. And same thing, what was BBB might have shifted down to BB. I point people to the ratings website where they've done a corporate default study, which said that anything that defaulted last year or started off at B or below, which is not what you'd expect from a high-yield portfolio of -- not your [indiscernible] BBB portfolio anymore.

Great. Well, that is all the time that we have. I know that there were some additional questions that came through. So please feel free to reach out to our panelists directly or they will contact you and answer your questions. Again, please utilize that resource widget. Given the questions that came through, it sounds as if we might be adding more to that. So after the replay, there are some good resources and white papers there. if you can, if you could quickly fill out the survey, provide any feedback and help us shape our future events. But on behalf of all of us at S&P Global, we hope you are all well. We hope to see you in person soon, but thank you again for attending and enjoy the rest of your afternoon or evening. Thank you.