The Westaim Corporation (WED) Earnings Call Transcript & Summary

Good morning. My name is Cam MacDonald. I'm the CEO and President of The Westaim Corporation. Welcome to Westaim's 2020 Investor Day. Originally, we were planning for this to be an in-person event last May but deferred in hopes that normalcy would return. But here we are. So today, we are presenting to you from multiple locations. I am in Arena's Manhattan office, alongside Dan Zwirn and Parag Shah. Andrew Robinson, CEO of Houston International Insurance Group, joins us from Houston. And Rob Kittel and our Westaim partners are in Toronto. In addition, I would like to express a warm welcome to the directors of Westaim and HIIG and to all our colleagues at Arena, HIIG and Westaim that are joining us today. In years past, we have hosted this Investor Day as an opportunity for us to provide a fulsome presentation and, in turn, to provide you direct access to the management teams of Westaim, HIIG and Arena. As best we can, we hope to provide a similar format for you this morning. And those who wish to have a follow-on dialogue, please let us know and we will facilitate accordingly. In keeping with our past Investor Days, I will open with a few brief comments and then invite Andrew Robinson, CEO of HIIG, to make a presentation. Thereafter, Dan Zwirn, CIO and CEO of Arena Investors, will do the same. I will return with some concluding remarks and hope this collective overview provides everyone a good understanding of your company. Today's virtual meeting has the ability for attendees to submit questions to all presenters regarding the topics covered. Using the interface, please send in your questions. And Andrew, Dan and Westaim will answer at the conclusion of all our presentations during the question-and-answer portion of this event. Thank you. In our 2018 letter, which was the 10th anniversary of the current management team, we guided that the past decade could be viewed as 2 chapters. Chapter 1, 2009 to 2013, Westaim acquired JEVCO and made material operating improvements in the business. We were close to a follow-on insurance acquisition when Intact Financial presented an unsolicited attractive offer, which was accepted. A special and sizable distribution was made to shareholders in 2013. Chapter 2 was really from 2014 to 2020. In 2014, Westaim closed on acquiring Houston International Insurance Group, a U.S. specialty P&C insurer. In 2015, Westaim partnered with Dan Zwirn and his team to capitalize Arena FINCOs and establish Arena Investors. Both businesses are growing, performing well and embrace a culture of excellence that is infectious. The challenge of the COVID pandemic have been minimal and in many ways has created opportunities and favorable trends. Both Andrew and Dan will speak of their respective operating environments. Westaim enjoys 2 core businesses. Certainly combining an insurance company with an asset manager is not novel. And in recent years, credit has become more coveted and embraced. This is a familiar slide where we continually update the investments held by Westaim. We do believe that as HIIG and Arena Investors continue to grow, Westaim's share valuation should transition from a net asset value story to more of an earnings analysis. Again, a familiar slide and helpful to provide historical context over the past 5 years. As a measure of Westaim's performance, we do monitor growth in fully diluted book value per share and view it as a reasonable measure. The start-up of the Arena Group and the significant initial investment to put the business in a position to scale impacted the short-term growth of our book value in the initial start-up phase of Q3 2015 through Q4 of 2016. Westaim has been successful in growing book value in U.S. dollars for each quarter since the end of 2016 with the notable exception of Q4 '19 and Q1 2020. In this period, HIIG executed a loss portfolio transfer, an LPT, a transaction which is designed to mitigate the potential impact of adverse development on prior period loss and expense reserves. In addition, given the significant volatility of the global markets in Q1 2020, Westaim reduced the fair value reporting of HIIG from 1.1 to 1.0 book value. This, too, had an impact. The last few years have been challenging for small cap companies, and Westaim is no exception. While we believe we have created significant value in our respective companies, to which Andrew and Dan will speak about, our share price would say otherwise. I would note that this is not a new experience for Westaim. In our JEVCO years, we continually communicated improving results with reported profitability and growth, and yet our shares languished until Intact's unsolicited premium bid was announced. However, we believe Westaim is now entering the third inning of its maturity and development, and I will speak to this later on. Earlier this year, Westaim expanded its Board of 7 and welcomed 2 new directors: Lisa Mazzocco, the current Chief Investment Officer at the University of Southern California; and Kevin Parker, Managing Partner of Sustainable Insight Capital Management. Both are terrific additions to the Westaim Board, and we are a better company with their inclusion. In the spring of this year, we expanded the HIIG Board to 7 and welcomed Jim Hays, Founder and CEO of the Hays Group, which he sold to Brown & Brown in 2018; and Don Larson, retired President and Chief Operating Officer of Great American Property and Casualty Group and Great American Insurance Company. Jim and Don's collective knowledge, success and insurance industry relationships have been hugely additive and impactful. Again, HIIG is a much better company due to their involvement. Over the years, we believe our message to shareholders has been consistent. In HIIG, we acquired a okay business at a favorable price. Over the past 5 years, we've developed HIIG into a good business. And with Andrew's leadership, we are now poised to become an excellent first quartile business. Arena has evolved from a start-up to a global investment manager, a staff of 60-plus with offices and partners in New York, San Francisco, Jacksonville, Dublin, London, New Zealand, has created a very unique firm with unmatched skills, proprietary sourcing and IT systems. We believe our inside ownership and alignment has always been strong, and our conviction has only been reinforced by the insider activity throughout 2020. Today, our inside ownership hovers around 19%. At this time, I would like to welcome Andrew Robinson, CEO of HIIG, to the mic and to walk us through his presentation. Andrew?

Thank you, Cam. Over the course of the next 40 minutes or so, I'd like to give -- those of you who have been investors in Westaim for some time, give you an update and an overview of our business. For those of you who are new investors, hopefully, it will be a helpful introduction. And then I will turn my attention to just giving you a sense for the activities that were started some number of quarters ago to improve our financial performance. And then I'll spend the remainder of the time talking a little bit about our strategy and our direction that we as a firm are committed to, to develop HIIG into a top quartile financial performer. Rob, could you move forward here 2 slides? Here we go. As Cam noted at the outset here, HIIG is a specialty insurance company. And interestingly, amongst the specialty insurance segment, we're one of only a handful of companies with a capital base less than $1 billion, which for us actually is quite advantageous in terms of our ability to attack specific segments to be able to build attractive profit pools into our book of business. And that's very much a centerpiece of our strategy. We are focused on both property and on liability. We write on both an admitted and nonadmitted basis, which I'll explain in a moment. But importantly, our strategy is very much around driving towards segments that we believe offer very attractive profit characteristics, oftentimes very niche segments, where we can deliver consistent returns at all parts of the cycle. And we can do this because we're establishing positions in each of those segments that we would view as being defensible, less assailable. A core part of what we're doing as a company is accumulating a team of very talented specialty professionals, particularly in the technical areas of claims and underwriting and actuarial. And that's a centerpiece of how it is that we're building our company and a centerpiece of our strategy. A second part of our strategy is really about the way that we are using our capital. A core part of our ability to achieve top quartile financial performance is about the portfolio that we're constructing such that we have a very efficient use of our risk capital. The company operates in all 50 states. We operate in select international markets. And as I mentioned, we do this on an admitted and a nonadmitted basis. And for those of you new to the insurance industry, when we say admitted, what we mean by that is that we have to file our rates and forms with each state's Department of Insurance to be able to conduct business in those states. On a nonadmitted basis, we have full freedom of rate and form. And the benefits of that dual platform are really interesting for us because at times like now where the market is actually what we call quite hard, where prices are increasing, more business flows into the admitted market. And we have a facility to be able to respond to that. At times when the market is softer or prices are decreasing, more business will flow into -- excuse me, more business will flow in the admitted market when times are -- when pricing is hard in the nonadmitted market and the admitted market when pricing is softer. And we have a facility to respond to that. I think many of you are aware that earlier this quarter, AM Best moved us from an A- negative outlook to an A- stable. And that's a really important step for us as a company as that financial strength affirmation by AM Best is critical for us to be able to go after the best business, to be able to attract great talent and for us to enter certain segments where there's greater credit sensitivity. And then finally, the company today is about 350 employees across 13 offices. On the right-hand side of this slide, I highlight here a few financial metrics, and I'll just note a few items of importance. Our gross written premiums, which effectively is our revenues before reinsurance, as you can see, have increased in '19 over '18 and in the first half of '20. But there's a significant difference between our gross written and our net written premium. That's the amount of reinsurance that we use as a company, and that itself offers an attractive opportunity for growth, which I'll talk about later on. The key metric for us as a -- Rob, if you can go back, thank you. The key metric for us as a carrier is our combined ratio. It's a measure of our underwriting strength and really sort of the core profit engine of us as a carrier. And you can see in 2019, we had a modest improvement over '18. In 2020, for the first half of the year, again, an improvement, although I will note that these numbers for 2020 are ex the cost of our loss portfolio transfer. When I arrived 3.5 months ago, I noted immediately how blessed I am with the quality of a number of the leaders throughout the organization. Mark Haushill, who is our CFO, is a deeply experienced public company specialty insurance executive. Previously, he's the CFO of Argo Group, a publicly traded specialty insurance company; and American Safety Holdings, which ultimately was -- it was publicly traded and sold to Fairfax. Sean Duffy joined in the first half of 2019. And Sean previously was the Chief Claims Officer at OneBeacon, a highly respected specialty insurance company that has subsequently been acquired by Intact. And on Monday, we're joined by Tom Schmitt, who previously was the Chief HR Officer at OneBeacon as well. And he'll be joining as our Chief Administrative Officer and our Chief People Officer. And I'll note that while I've not listed the names of various P&L leaders inside of our organization, I assure you that the roster that we have and that we're building of our P&L leaders is an equally impressive group of deeply experienced specialty insurance executives. Just a little bit about our portfolio. We go to market with 11 specialties, 5 of which are industry solutions. So these 5 industry solutions make up 35% of our revenue. And what do we mean by industry solutions? These are segments that by their very nature are specialty in nature. They're generally not markets that are addressed by the standard lines carriers. So they're not -- certainly not addressed by the standard line carriers within the standard lines portions of their business. And for those segments, we're oftentimes providing multiline solutions. General liability most often is our lead line. But we'll provide commercial auto, workers' comp, property, inland marine and other lines to those segments. Our next largest segment is our captives and our programs segment making up almost 30%. Next largest after that is our commercial property business, where we serve very large commercial entities with very significant insured values. The next largest after that segment is our accident and health business, which is a medical stop-loss business principally; followed by professional liability, where we provide errors and omissions insurance for a variety of professional segments as well as executive liability, which is directors and officers insurance, today principally to the private company sector; E&S brokerage, which I'll talk about in a moment, which is the result of us recently acquiring a very high-quality tenured team and combining in an existing business; and finally, a business that is very young for us, only about 1.5 years old, our surety business, which we see as a terrific source of future profitable growth. So it's these 11 specialties that we go to market with. One of the really interesting features of HIIG is simply the diversification of our platform. And I highlight at least 3 dimensions of this here, but there are others that I'll talk about throughout the course of the presentation. First is just the construction of our business around short-tail versus longer-tail lines. We talk about short-tail lines. These are lines where, in general, claims are paid in under 2 years from policy inception. So principally, you're earning your operating income through your underwriting results. There's oftentimes only a small contribution from investment income as opposed to medium or longer tail lines for which claims are paid out in sort of the range from 3, 4, 5 or even a longer period of time from the policy inception. And of course, the contribution for those lines comes from both underwriting income as well as investment income. And the sort of the power of the mix of business that we have is it provides us the kind of earning diversification that we want at times like now when investment yields are low, and we can still generate an attractive return because of the core engine of our short-tail business. It's also a super-efficient use of capital to have this balanced portfolio of long- and short-tail lines. Similarly, as I mentioned in the outset, our admitted versus our surplus lines capability is also a unique characteristic for us. The nonadmitted piece or the surplus lines, as it's referred to here, makes up 58% of our business. But again, as business flows from the admitted market, which oftentimes is the area of growth at times when market pricing is tighter or prices are going down, we're well positioned with the facilities there. And similarly, such as times like now, we're able to capitalize on pricing when it hardens with our surplus lines capabilities. And lastly, I'll highlight the diversification in our distribution sources. Today, about 55% of our business is sourced from retail agents and brokers. These are the originators and actually control the relationships with the insurers. 17% is with wholesalers, which is an intermediary to the intermediaries and oftentimes will provide facilities that access specialty solutions such as ours. And then finally, 28% is delegated in the form of managing general agents, where we will provide some limited underwriting authority to a distribution partner. I think that what you should expect here as we develop our business over the coming handful of quarters is probably a more balanced mix. Increasingly, our wholesale will become a larger portion of our overall distribution. Just to wrap up sort of the overview here on our investment portfolio, we are very conservatively positioned. Nearly 50% of our investment portfolio is in core fixed income, and that group of core fixed income securities is very high credit quality, an average of AA+. Just under 25% is cash and cash equivalents. And then the remainder is alternative investments managed by Arena equities, which is principally large cap, has a domestic bias and then some alternative investments as well. And as you probably -- for those of you who've been in the Westaim stock for some time, you've probably heard from Cam in the past that we follow sort of this barbell liquidity concept where, on one hand, we have a significant amount of cash and cash equivalents, and our durations in aggregate are very short, less than 2 years. And on the other hand, we couple it with much higher income earning, higher-yielding investments that are managed by Arena. So it's that unique combination of ensuring that we have liquidity while also targeting a portion of our portfolio towards these higher-yielding investments. So let me spend a minute talking about the actions that are being undertaken to improve our results, and a number of these actions began before I arrived. And certainly, we are accelerating on certain actions. And we'll continue to execute on a number of these as we look forward over the coming handful of quarters. So just looking back at the past year, really astonishing, the number of things that have been achieved. First, of course, is we completed the rights offering, and we raised $100 million. And that both gave us capital to support the growth and just strengthened our financial position. As Cam mentioned at the outset, we executed on a loss portfolio transfer that effectively transferred the liabilities for the 2017 policy year and prior and cut off the potential for material adverse development going forward. We took a number of steps to improve the performance of the in-force portfolio. We're in our third year of rate taking. And this is really important because when we're able to drive price in excess of loss cost inflation, that effectively just translates to an improvement in your underwriting margin and your operating income. And we've been doing that across all of our businesses over the course of the last 3 years. We've targeted our growth only to the segments where we believe we have the best profitability prospects. And we know that if we invest in the right way and make the right underwriting decisions, we can build strong and defensible positions. While I certainly wasn't exhaustive in this list, these are just examples of places where we pressed down on the accelerator, we've added talent, we believe that we're building very attractive positions in property, in heavy equipment inside of our construction business, and I'll give you an example of that in a moment within our mining business and within a business that we launched in the last 2 years, our trucking business. We also took action to exit those areas where we didn't see a path of getting to our target returns and to building sustainable, defensible positions. Most notable is that since my arrival, we have exited our monoline workers' compensation business. We exited a large lawyers professional liability program. We exited a portfolio within our professional liability segment, our insurance agents and brokers professional liability. And then in a number of categories where we actually do believe that we have a line of sight to achieving our target financial returns and building strong, defensible positions, we did still take action in segments to ensure through reunderwriting that we're able to have a confident -- competent progression towards our target returns. We certainly added A talent throughout the organization. Within claims, since Sean's arrival in the first half of 2019, we've turned over nearly 50% of our claims staff and really added some just spectacular talent. We have a new Chief Actuary and new Head of Enterprise Analytics, both of whom came from very well-respected specialty insurance companies. We doubled the size of our actuarial team. And quite honestly, through underwriting and nearly every other part of our organization, we have really deepened the quality of the team and the bench strength throughout. I'm just -- I couldn't be more pleased with the momentum that we have on the talent that we're adding. As Cam noted at the outset, we've added 2 genuinely world-class Board of Director members in Don Larson and Jim Hays. Each brings a very different perspective. And my own view is the contribution that each are making to our Board and to me, personally. Don Larson, with over 40 years of experience inside of Great American and running Great American over the last handful of years of his career, is just a terrific executive and a terrific sounding board for me personally. As I mentioned, when I was overviewing the 11 segments, we launched a new property and liability E&S capability seeded with a team of very deeply experienced, high-performing specialty professionals that I know personally. And we were able to contribute in a portion of our business. And that's an example of the kind of new business efforts that we'll be undertaking here in the quarters to come. And then finally, in this quarter, we certainly were gratified that AM Best recognized each of the actions that we took as they moved us to a stable outlook, which is a critical milestone for our organization as we start to build the business and adding great talent and adding some of the new capabilities that we seek to add over the coming quarters. So I'm going to give you a deep dive on one example of the type of reunderwriting that has started prior to my arrival that certainly gives me a confident view in the strength of our franchise. And hopefully, for you as our investors, you'll be able to see through this example the kind of progression we are making. This is specifically focused on our construction segment and specifically inside of construction, an area that we call heavy equipment, which you should think of things like crane and rigging as an example of what would be included in heavy equipment. If you go back 5 years, this is a business that was over $50 million in premium. And if you look at the lower left-hand graph, we were running at over 100% loss ratio. Now this is a business that for us to achieve target returns, we'll probably need to be in maybe the 60% to 65% loss ratio range. So we're not only not getting -- hitting our target returns in this segment, we're losing money. What we discovered following the decision of moving this business effectively into runoff is there actually was profitable business inside of this heavy equipment segment, but it wasn't visible until you started to unpack the characteristics of the underlying risk. And what we discovered is that actually, the smaller clients, the clients with less than $5 million in revenue, had been running quite well from a loss performance perspective. Yet unfortunately, as shown in the graph on the lower right, we were just upside down in terms of our mix. So it obfuscated the results. So as we started to drive down this business effectively with the aim to put it in runoff and we began to discover there were segments that, in fact, were attractive and that we could seek to understand and identify and underwrite only those segments, we did so. And in 2017, we started to target only writing the heavy equipment providers where their revenues were actually on the small end of the spectrum of what we had traditionally been serving. And we started to build a book in '17 and '18. We had tools and techniques that allowed us to understand whether that book was performing in a way that was consistent with historical -- with the historical information that we had about the performance of those smaller insurers. And sure enough, it's performed extremely well. 2019 rolled around. We built the business a little bit larger. And this year, this segment will be between $15 million and $20 million. It will operate at around a 50% loss ratio, which is a very attractive outcome for us. And here's a great example of where we took a business that was vastly underperforming. And ultimately, we were able to identify the sort of the profitable core and build a little niche around this profitable core as part of our construction business. So one of the things that I personally am very gratified by when I arrived, it was just the quality of data that HIIG had in place. And we've made an investment in building an enterprise analytics team. And that enterprise analytics team, in a very short period of time, has dramatically advanced our business intelligence efforts. And the information that we're deploying to our underwriters, our claims professionals and our actuaries, from my vantage point, my 32 years of working in this industry, are as good as anything I've seen. And I think that similarly, the other executive team members would say that this is the best information they've had to work with in their career as well. And the power of this is that much of what we're able to do is really look at any portion of our business and deconstruct it down to specific risk characteristics. So we can see what are the parts of the business at a very granular level that are performing and that aren't performing. And we're able to use detailed information that tells us about the performance of the business before the loss is fully developed. Things like being able to look at frequency of claims on a month-to-month basis and be able to compare that against benchmarks for us is incredibly powerful. It allows us to see opportunities where business is performing well and maybe want to accelerate in those segments and similarly, to be able to see areas that might be developing adversely for us and take action long before those develop into meaningful loss dollars that can affect the operating earnings in our business. So this is an area that we're making big investments in, but we're in a very good place today. And it really allows us to sense and respond to the market conditions and the performance of any of our portfolios early and act accordingly. So let me just provide another example that's not necessarily on the defensive side but on the offensive side. For those of you who follow the industry, you're probably aware that commercial auto and trucking specifically has been a category that has been under intense pressure here for 10 years, principally driven by the plaintiff bar and loss cost inflation. And I think in the last 10 years, the marketplace in trucking has earned a profit only once and has come nowhere near earning its cost of capital in any of the years. But this is a great example where we identified a segment, looking at intermediate freight risks with 20 to 50 power units. We targeted that segment because we believe that in that segment, you're dealing with professional companies, but they're not so large to self-insure. We targeted states principally where we believe that the characteristics are more attractive, and so a number of Western states, along with Texas. And we go to market only with 3 distributors. So it's a very tight distribution. So we're really joined at the hip with our distribution partners. We're targeting writing very clean and highly desirable risks that are controlled by those distributors, and we can do that because performance has been so bad in this industry that much of the capital is pulled away. And so it's created this opportunity where we can focus on really the pristine business. And we know it's the pristine business because of the way that we're underwriting the accounts. We're intensively focused on using third-party data. One example of that is that we're power users of something called CAB or the Central Analysis Bureau. And we couple that with proprietary information that we ask of all of our insurers insurance to provide to us, which is the driver data from the DOT, something that's proprietary to them. And we will not underwrite the risk unless we understand the history of the drivers that they have on staff. And so together, we're able to really make sure that the business that we're selecting, in fact, meets the kind of characteristics, the high-quality characteristics that we seek. When we put the business on the books, we don't stop with just the underwriting. We continue to use CAB to see if there's any changes in the performance of that business. We require the use of telematics so we can identify adverse driving behaviors and address that accordingly early before something goes wrong. When, in fact, claims do occur, we respond with a quick strike accident response, which allows us to get to the site of the accident fast, which is critically important because the plaintiff bar is so active in this segment today that getting to these events early allows us to take control of the claim in advance of what might be attorney involvement. And then finally, we selectively use reinsurance, particularly facultative reinsurance, to limit the severity of losses that we can incur. And we do that on selective cases where we believe it's warranted. And then the final point which is really just astonishing when you look at it, sort of just on a factual basis of us being a price maker for the market, we're writing the risks in this category anywhere between 15% to 100% higher than 4 competitors that we're monitoring. And we're able to do that because of our singular focus, our distribution partners, sort of the narrow geographic mix that we're pursuing and avoiding sort of having a share of the market but rather being focused on the specific segment that we believe is the most attractive for us. And the early indications are that this business is performing very well. And we expect we're going to have a substantial profit generator for HIIG in the years to come. So I'm going to wrap up the overview of the actions that we've taken to improve performance with a somewhat sort of technical topic. It's related to the area of loss picks and IBNR, and I'll explain this hopefully in a way that maybe take some of the technicalities out of it. When we set our expectations for results for a year, we set in place a loss pick based on actuarial indications and our historical performance. And so I use 2 segments, and I've obfuscated the segment names just for competitive reasons. But this is indicative of our book in total. If you look at how these segments were selected in terms of ultimate loss ratio in 2015, these were segments that we picked at a far lower level than today where we're picking these businesses to perform. And these 2 segments' cases had a 68% versus 62% and had a 64% versus a 61%. At face value, you might think that, hey, that just means that this business is going to perform worse. And I would argue quite the contrary. If you combine rate that we've put into the business, the reunderwriting that we've put into the business, these businesses should outperform how they had historically. The difference is that when loss picks were made historically, they were picked at a level where frequently, we would see adverse development, which is something that we are absolutely trying to avoid. We're trying to position ourselves in a far more conservative position and, if anything, to have favorable development. And the really interesting part is the bottom part of this slide. There's this notion called IBNR, which is incurred but not reported. Effectively, what this is, is a loss reserve associated with future existing claims or losses that will develop beyond what the expected development for those individual claims would be as well as additional claims that have not yet occurred. And so what's interesting about this is if you look at our policy years 2017, '18, '19 and '20, what you can see is at the evaluation period of 3 months of seasoning and 15 months of seasoning and 27 months of seasoning, the amount of IBNR, which is a bulk reserve for future unknown losses, is at far higher level for every one of the subsequent policy years as compared to the prior. This is a really great indicator of conservatism. And in fact, it ties directly to the loss picks above. What we're doing is we're saying, we can't see these losses, so we're going to take a very conservative position as compared to how we did in the past. And in fact, it's this type of conservatism that gives me as the CEO, Mark Haushill, our CFO and our Chief Actuary, great confidence that what we're doing is taking an entirely different position with regards to the liability side of our balance sheet, a far more conservative position where, quite honestly, we would be very surprised if we see the kind of adverse development or any adverse development on these more recent policy years as compared to the performance that we've experienced in the past. So let me transition into just sharing with you the strategy and direction that we as a company, that I've communicated and our team has embraced, that will drive us towards top quartile financial performance. And I'll start by just giving you a bit of industry backdrop and then very much about how it is that we think about our strategy. So I think it's fair to say that the market is disrupted. I've been in this industry for 32 years, and I think that there's probably been one market like this during my career where we're seeing prices increasing across nearly every line and increasing at levels that are incredibly attractive for the risk takers. The drivers behind this, interestingly, are years of soft market pricing. What we mean by soft market, it's where pricing in the industry is not keeping up with the inflation of loss costs. And so when you see that year over year over year over year, that has a compounding effect and certainly impacts your underwriting margins. For me, I think it's probably 14 years of soft market pricing, except for a period around 2010, '11, '12, where we had a little blip and some improved pricing. But the compounding of that has certainly been a factor. A second feature that has very much emerged in many of the liability lines of business over the course of the last 5 to 7 years is the increase in social inflation. And what we mean by that is that we are seeing judgments on legal actions as well as just claims outcomes because of attorney involvement that have increased at levels that are far higher than traditionally how loss costs inflated year-over-year. And so in some classes where maybe loss cost inflation might be 2% or 3%, we're seeing for multiple years loss cost inflation more like 6% or 7% or 8%, which means that you need the price to increase at an equivalent level just to hold your operating performance at a current -- constant level. Leakage on prior year CATs has been a huge contributor. In the 2017 year, the industry believed that it had a good view on the ultimate CAT losses for that year. It continued to develop in 2018, 2019. And the effect of that really had a tremendous impact just on the capital of the industry as well as what both the insurance and reinsurance community thought would be the ultimate cost for those CATs. One of the principal impacts of that is trapped capital. So the retrocessional market, which is the reinsurance market for reinsurers, much of that capital is collateralized. It became trapped and tied up. And because of the interconnectivity of capital in our industry, over a period of time, that starts to have an effect across other lines of business beyond CAT. And certainly, we've seen that over the last few quarters. And then finally, the impact of COVID, which, depending on what information you reference, we could call it just an extremely large CAT that's going to play out over many years. But the impact of that on top of these other factors has really brought us to a point where now rates are being recalibrated. And the industry is making an assessment of what's required to be able to achieve target returns. And one of the byproducts of that is obviously capacity is constrained, but that lasts only for a very short period of time because now what we're seeing is a considerable amount of risk capital coming into the market. And by our estimations, we've seen as much as $16 billion of equity and debt capital come in, in broadly what I would describe as our competitive set, so companies that are touching one or more of the segments that we aim to focus on. In some regards, that's really good. It's a validation that putting risk capital to work right now is attractive. On another basis, it looks very different than prior markets, where companies would go into Bermuda, raise capital at far lower levels, and you wouldn't see this kind of very efficient flow of capital coming into the market in such a short period of time. But nonetheless, we still think it's a very attractive market and an opportunity for us to drive a considerable amount of profitable growth. So I'm going to give you an overview of a slide that we use inside our organization, which is very much about sort of the 7 pieces of how it is that we aim to win as a company. So first is all about talent. In every category that we compete in, we have this idea of building a team of the best. And we've done that with our E&S team. I suspect you'll see from us in the next handful of quarters a series of other announcements of similarly high-profile, high-quality, deeply experienced professionals so that we can go after other segments. So that's certainly a core pillar for us. Second core pillar is all about execution. If we can't do the fundamentals at a very excellent level, it's hard to be a top quartile performer. And so our commitment to doing underwriting and our claims execution, our ability to be able to understand the profitability of each and every segment, it's that daily excellence that we as an organization are focused on. Tremendous discipline around holding ourselves accountable such that every business and every segment that we compete in, we want to be able to generate our target returns in those segments. We want to be a top quartile performer, but we want to do that in every single part of our business. And we want to do that at all points in the cycle. And so this diligence around sort of our financial management is clearly being embraced and has become, in a very short period of time, a core pillar of how we operate. Activating tech to gain advantage. Given the fact that we are a company of the size that we are, as opposed to a company such as Travelers, for us, we have to be incredibly disciplined about where is that we're utilizing technology and forcing ourselves to be clear minded around technology investments that support what we're doing and advance our competitive advantage. And I showed a bit of that when I described how it is that we're building our business intelligence platform, which I certainly believe is part of our advantage. But within specific segments, things like our investment and how we're using CAB within trucking is another example, third-party data for us to be able to ensure that where we choose to compete, we're doing it in a way with technology that strengthens that position. Now one of the sort of key facets of the organization that I was so pleased to see and certainly seek to propagate as we go forward is just our nimbleness, our entrepreneurship and our enterprising nature to capitalize on disruption. As a smaller company, we're really well positioned to do this. And I think it is one of the sort of the key aspects of who we are as a company. And we certainly don't want to lose this as we grow and we become more successful in each of our businesses to not ignore the other opportunities that market disruption creates for a company such as ours. This idea of fortifying our franchise, which brings together these other 5 items and really tries to crystallize it into a couple of key points. One is that in the places we choose to compete, we need to understand those segments better than anybody else, this notion of uncommon insight. And similarly, since we understand these segments so well, how we organize and deliver our products and services to those segments, that's all about our unique approach to execution. And when we do that well in each of these segments, we will build positions that are less assailable. And in an industry where risk capital is pretty easily substitutable, this is the elements that allow us to achieve top quartile performance. And then just pulling this all together into this theme, which for those of you who interact with our company more over time, you'll hear a lot about, this notion of ruling our niche. Where it is that we choose to compete, we want to be the player. We want to rule those segments, right? So when I talk to you about, for example, what we're doing in heavy equipment, that's a category where we want to be the best, at least be the best in the part of the market where we choose to compete. The same in trucking, and the same is true for nearly any other segment where we choose to compete. And what's interesting is when you pull this all together, I will tell you that we don't think about strategy in terms of it's do this, do this, do this. This is very much a mindset that our leadership team has come together on, we're aligned around and we're committed to do this. So when we look at any of our businesses and any new opportunity, we're looking at it through these 7 lenses and asking ourselves, "Are we able to sort of execute on these dimensions such that we're able to garner a position that we believe allows us to generate outsized returns?" So a little bit of translating this specifically to profitable growth. And for simplicity, I organize the outlook on profitable growth around 3 themes: expand where positioned for growth today, adding profitable adjacencies and then pursuing new specialties that are aligned to our strategy. And I just put little checkmarks next to examples of areas where we're already -- we've already activated or we're in the process of activating. So growing in very strong positions such as mining and surety and specific lines within our professional indemnity and transactional property, by adding staff, by selecting where it is that we could press down hard on particular types of business, we're doing that in these segments and others. Examples of profitable adjacencies. Right now, because the market has moved so much, within our executive liability business where we write D&O principally today for private companies, we're looking to set up a facility to write public company excess. And interestingly enough, the fellow who leads our unit in that area has a great track record writing public company directors' and officers' insurance. And now the market's at a place where it's very attractive for us. So we're looking to provide a facility in that area. And then as I mentioned to you, the team that we brought on to launch an excess and surplus lines of business focused on general liability and property to the wholesale brokerage market is one such example of the kind of new specialties that I think you'll see with some frequency us launch in the quarters to come. So back up one slide, if you would, Rob. Thank you. I think it's really important just to bring this all together with how we as an executive team talk about how all this thinking comes together. First is this real belief at the most basic level that we're executing on this strategy. We're holding ourselves accountable to the strategy that we set out and that we're going to execute at a high level. And if we do that, that's just the core foundation of us driving significant value for ourselves and for our shareholders. Our goal is top quartile performance. Cam mentioned this at the outlook -- at the outset of the meeting, and we're doing this through a combined ratio lens. We have a good view in each of the businesses, what that means. But the goal here is not just to do this at specific points of the business cycle but to do it at every point in the business cycle. So it's really about the consistency of our performance that's really important to us. Where it is that we put growth capital to work? We're going to seek to do it in a very accretive way, whether it be in areas such as increasing our risk retention, so reducing the gross to net ratio; whether it's the organic opportunity such as those that I just shared with you; whether it's new categories or niches that I've indicated we'll be doing more of; or whether ultimately, it's part of our strategy to be able to selectively take on acquisitions that are accretive. We're only going to put growth capital to work where we see it being accretive for us and for our shareholders. And then finally, this sort of equation on managing capital efficiently. And I referenced this at a couple of different points through the presentation. The balance of short tail versus long tail, the way that we're constructing our underwriting portfolio, it's with a view to minimizing volatility but also making sure that our capital consumption is efficient. And the other side of that is how we manage the asset side of our balance sheet. And we are fully committed to a strategy which is to pursue an overall investment approach that allows us to generate attractive returns on our investment portfolio while minimizing market and liquidity risk and ensuring that we're doing it in a way in which we're avoiding rating and regulatory capital charges. If we do these things well, we're quite confident that we're going to achieve the top quartile performance that we've set out to achieve as an organization. So let me just wrap up and just offer a brief vision for where we're going as a company. All of this is interesting. But in the end, I think that we want to be able to look at our business through a few simple lenses, right? One is that this idea of being a focused specialty insurance company, but we're the place where the patina of talent wants to come work. And we've got some early indicators that, that's really happening now. The best partners, and there are great distributors in the marketplace, they want to work with us. And customers bring their business. And we've got some early proof points on that, and we want to see that in all parts of our business. But most importantly, where these things come together, and our top-tier performance ensues. And so this is the vision for our business. So with that, I'm going to hand it back over to Cam to introduce Dan. And I look forward to taking questions at the end of the prepared presentations. Cam?

Thank you, Andrew. At this time, I invite Dan Zwirn to the podium. But before Dan speaks, we would like to play Arena's animated video. This 3-minute overview can be found on Arena's website, and it provides a simple, refreshed overview of the firm's services. [Presentation]

Dan, over to you.

Thanks, Cam. Thanks, Cam, and appreciate everybody on the line listening to us today. I just wanted to go to the next slide. Page 36, are we on there? Basically, just to remind everybody about Arena, the video that we just showed was an attempt by us to give some of our stakeholders a better understanding in a very hopefully digestible way of what we do for a living. What you see on Page 36 is a reminder for us every day. Why do we have edge? Why do we exist rather than simply being a price taker in markets? And these 3 pillars are the base upon which we really compete and win out there: The -- our mandate flexibility, our sourcing edge and our servicing and infrastructure. Part of what you saw in the video is we're not looking to be another private credit manager, another commercial mortgage owner, et cetera, et cetera. I don't know that the world needs another one of those. We want to deliver a highly differentiated return per unit of risk. We think about mandate flexibility. We first start and say, what portfolio do we want to build? And frankly, a lot of what we do in some ways resembles what Andrew just talked you through. We collectively want to have a portfolio that is as uncorrelated to the overall market as possible but also individually has as low a correlation amongst its constituent parts as possible. Part of the issue that any manager of assets contends with is moral hazard. We don't want to be in a position to have to do something, to have a narrow mandate that forces us to suddenly become price takers instead of price makers. And so with our mandate flexibility, it allows us importantly to do what makes sense, but even more importantly, to avoid with that which doesn't. And as we've seen here particularly in the last 6 months, and it happens as cycles move, the extent to which -- given permutations of industry, product and geography that we look at are compelling, is it varies very, very widely and very, very sudden. And so we don't want to be in a position to kind of hold our notes and have to do things that are kind of the least worse. With regard to sourcing, this -- we have a network that, again, in some ways, for example, is what you might see in HIIG in terms of the thought around MGAs and MGUs. In addition to having 55, 60 people now in New York, London, our operations center in Jacksonville as well as our outposts in Melbourne and San Francisco, we have over 40 joint ventures with another couple of hundred employees. And the only thing that is similar among all of them is that they are variable cost access to us and highly, highly financially aligned, writing checks right along with us, being up or down right along with us. While we retain all of the decision-making upfront and along the way, controlling the bank accounts, controlling the cash, but really create in them a sourcing servicing front end that's very, very valuable and gives us a lot of edge and where we are covering virtually every conceivable permutation of industry, product and geography around the world so that we're aware of what makes particular sense and what things we really, really should avoid. With regard to servicing and systems, we've invested 10s of millions of dollars going back nearly 15 years or, in fact, over 15 years. And I think we're very early to the notion that, again, we are a nonbank-bank financial institution. It's not about a few Bloombergs in New York and London. It takes an immense amount of focus and process orientation in order to have the diversity of investments that we have while still maintaining an orderly operation that is scalable. And so in everything we do, other than the idiosyncratic nature of our investments, we're looking to systematize and process orient things such that we effectively have the efficiency of a well-honed sausage maker. Just as a reminder, we generally divide the things that we do into these 6 buckets: corporate private credit, real estate credit, C&I, structured finance, consumer assets and corporate securities. That's not to say that these are defined term asset classes for us. Lots of different -- there are lots of different ways to categorize the assets that we see out there. In everything we do, if you look deep and uncover the underlying pieces of what we're attacking, it's highly asset secure. It's very focused on duration and getting paid for duration of taking it. It's -- and we're ultimately asking ourselves, "What are we getting that's extra?" We are not interested in price taking. So when external party come to us, and they say, "Well, this or that private lender has thought about this or given us that," we say, "You need to go do that. And then when you're done doing that, and it doesn't work out, here we are." And so we're always asking, what's the wrinkle that allows us to get paid extra? And in situations where both buyer and seller, both borrower and lender have the exact same view on value, but we can go into a geography that is out of favor, whether it's Italy or Greece or Argentina or Puerto Rico, where babies are getting thrown out with the bathwater and find very good return of risk, we can go into industries, and we'll talk about it a little bit later, whether it's E&P, aviation, retail, where no one wants to be involved and can kind of demand to get paid extra while taking very -- containing the risks, or in situations that are very specific where somebody either offensively or defensively has an interest in paying a very big premium for the alacrity with which we work and speed with which we can work and get things done. On Page 38, you see some of the development here. At the end of the day, couldn't we have theoretically built "faster" along a very narrow base and said, "Let's get to AUM, come hell or high water, on very narrow things and while taking on market risk and being price takers?" Absolutely, we could've. But the idea here is to build an enduring business with material economies of scale and a very distinct edge. And so we took our time. And we built this slowly but surely. And as we'll talk about, I think we're at a time now in the development of the Arena business where we're done with our wholesale construction, if you will, and now really just building upon capabilities that we've already put into place. And in my view, ultimately, this can be -- this is a platform that can manage several, several times the amount of assets it manages now. You see in the organizational chart, as we talked about with our investors 5 years ago, you can't build a global platform the way that we're talking about without having people with very, very significant, deep experience. And what you'll see here is we were able to not chance on it and really bring people with 25 years average experience across every facet of our business. Nobody is doing this for the first time in the front, mid and back office of our operation. And as you'll see here in the org chart, we're still relatively top heavy. And that really means -- goes to the fact that a lot of our growth from here will be primarily in just adding more and more scale through junior resources, through operational efficiencies, through our operational center and our ability to outsource appropriately to kind of deliver the same type of return per unit of risk over a broader base of assets. Here, we see some of the background, and you'll see nobody is lacking for a whole lot of years of experience. Nobody has done this for the first time. The culture of the firm is very much a kind of solid, sober, methodical one. There's a real commitment to process. We are seeing ourselves, again, as a nonbank-bank, process-oriented financial institution, not traders. We -- this is a business that can create and -- for its owners very, very significant and tangible value, and we seek to do that. When you talk about the platform again and this notion that we've constructed the base, and that really comes in the form of the systems and process into which we've put many millions of dollars. It goes to the people that we have and our -- across the board and our front- and mid- and back-office capabilities. And then finally, it goes to the methods by which we've taken capital. And this is an important part of what's going on here in that we may -- some of you may remember that we've talked to the notion of 4 core balance sheets. And those are our permanent capital for our FINCOs; our open-ended funds; our separately managed accounts, largely with insurers; and now our closed-end funds, which we've now closed. In addition, where there are situations where there's very good, very favorable return per unit of risk but in lower absolute returns, frequently favorable for insurers, we have our income account strategies. And as well, we have this notion of excess capacity. So because we are looking at a broad group of things across the world, we frequently see situations where there's a very, very broad opportunity. But at the same time, we want to maintain a level of diversity within our flagship funds that are necessary to kind of create the returns that we wanted. And so what we've seen in our New Zealand real estate business is here's an opportunity that's enormous relative to the -- our ability to fund it relative to the capital that's there. And so there will be times when, as opposed to a conventional asset manager where we say, we will go do this thing, we hope you give us money, we hope it works out, there are things that we are already doing very successfully that we like a lot. But by virtue of the fact that we're going to maintain a good amount of diversity both in position number but also on the relative lack of correlation amongst the things we do, we're going to create excess capacity opportunities that can be entered to the benefit of our partners and owners as well. We see -- again, we have a platform. We've delivered on the performance. We've put out over $2 billion in illiquid transactions across almost 200 transactions. We've exited 91 with 18% average returns on approximately 65% loan to value, almost all first lien, duration less than 2 years. We don't think there's many folks out there who are delivering as a totally [indiscernible] manner more return per unit of risk out there. And then it's a question of, from there, how do we package that efficiently? How do we eliminate cash drag? How do we finance that in the right way so that, that underlying performance gets through to our LPs, gets us the scale necessary for it to get to through to our LPs, drives more performance in terms of our asset management growth and creates the virtuous circle that we believe we're now kind of entering and the nature of how our business is positioned? I'd also note that with regard to our current portfolio, we also show our intermittent returns. There is no reason that I see to believe that our returns on what we own today are in any way, shape or form different than the returns we've realized on our existing investments. Page 44 is important. So now that you're approaching being a real grown-up business and thinking about, "Well, okay, we've built it. And how are we going to optimize it to deliver value to our owners?" We have spent a lot of time thinking about the notion of financial planning and analysis and how we're going to optimize ROIC back to our owners. And there are very -- there are a lot of different models out there for asset managers. And there are lots of ways that different sectors of the market value different types of [indiscernible], whether that is through management fees or net management fees or what they call fee-related earnings, whether through incentive fees or even, in fact, how our -- how the earnings stream that we create can be -- is ultimately valued by those who might, as an example, value our associated insurance now. And so now that we're at this point in the development of the business, we can start to really look at our key KPIs, look at what we're going to optimize and deliver value not only to our LPs, which we've continued to do, but also to our owners. And so this is a very, very basic initial framework that we want the review to go over. And you can see how ultimately, the operational leverage that we have here as we gain AUM, as we gain more efficiency with our OpEx, as we gain more ability to amortize kind of upfront expenses and the various kind of administrative expenses associated with managing our business over greater levels of assets, as we appropriately finance our various entities in order to optimize returns both to LPs and ultimately to owners, we should see -- we should be held to a continuous driving of operational leverage in this enterprise. We see here the returns that we talked about. And again, the -- our returns at the asset level are those around which we're very satisfied. We continue to see there's going to be material opportunities to do a lot more of the same or better return per unit of risk as we scale. And as you see with this total return here, we were going to continue to drive this upward. It's nice that our net outperforms a whole variety of different benchmarks. But given the nature of the underlying investments that we invest in, we're going to -- and the efficiencies that we can drive, we think that delta between ourselves and any relative benchmark on a net-net-basis will only increase. You see here, there's no notion of -- when you do the business that we do and you do it correctly, there really should be no notion of, well, this is a good market for you, bad market for you, et cetera. We're not in a position of either implicitly or explicitly calling markets. To be clear, we don't know anything about the macro. We're not going to bet on currencies, commodity prices, what -- one government versus another government and for certainly any kind of epidemiological views because we're certainly not doctors either. And so we're going to continue to deliver returns that outperform day in and day out. And the very structure by which we optimize the return per unit risk means that we don't have to have a big, top-down, macro view on the world because the positions show themselves from the bottom up, and there's nothing stopping us from doing things that do make sense and not doing that which don't make sense by virtue of the structure and the investments that we have. So we're not in a position where coming into COVID, we are long CLO equity. We are long middle market corporate loans. We are long underpriced commercial mortgages, where those things didn't make sense, COVID or not. And we're 6 months into COVID, but we're 12 years into a giant asset credit bubble. And we're aware of that every day. And we've always asked ourselves, if we're going to be in this position going back to October of '08, how are we going to be? If the answer is bad, we're not doing it. And that really left us in good stead because we didn't kind of fall over ourselves to follow trends that were in areas where there was clear diminishment of return per unit of risk out there. You see the assets under management development. We're at $1.5 billion. We see -- in a very near term, we feel very comfortable seeing that hit $2 billion and above. We are working very hard with Parag and his team as we process these different areas of investment and types of investors. As I mentioned, with our 4 flagship areas, there are no more kind of key flagship areas to do. There are no more nonflagship in terms of we have our income strategies. We have our excess capacity plans. So now it's really, really driving growth in things that we already have. And as many folks who are familiar with the asset management business knows, everybody likes to be this -- a third investor in the third fund, right? So we're now getting to a point where we are gradually getting the benefit of that. And we think it's exciting because when you think about this enterprise, the entry barriers to create this are enormous, enormous. And certainly, had we not had the ability to kind of get to this level -- scale of infrastructure, scope and capabilities pre-COVID, I can't even imagine how one would accomplish that now. And so we feel we are inside of a great number of moats and very well positioned with regard to where the market is setting up to continue to develop the business. We see here, it's a little more granular in terms of giving our investors and our stakeholders a view into how we're adding to our AUM, which ultimately fuel our business. We're also focusing on the margins we get, the cost of goods sold, so to speak, directly from our investors. And we have a considerable amount of what I would call founders-type capital. And we're going to see that over an extended period of time decline and look for that to happen quite a bit over the next few years. We're going to be able to continue to deliver in our -- in fact, in our open-ended funds. And because the capital is retained, that helps us to effectively compound our AUM. And we're going to continue to -- significant emphasis on those funds as well. And we think that we're in a decent track and like to have this view directly into that so people can see how that is shaping up. With regard to the overall outlook, as I mentioned in the prior parts of the conversation, I think that this market is setting up really, really well for us and that -- or effectively, a whole series of markets are setting up well for us. What we found is, obviously, initially in March, there was a notion of, "Wow, we're right back into the eve of an '08 or '01 or '02 or a '98 or '94." And ultimately, the secular difference here was that the degree to which both monetary authorities and governments were willing to enter the market directly to move securities prices was really unprecedented. And the ubiquity with which that activity has happened, the consistency with which it's happened, has created kind of one of the greatest moral hazard situations in markets of all time. As we saw on June 11, as an example, when the market was down 2,000 points and our trading business, we were up, you couldn't -- there was a very long line around the block of monetary authorities and governments trying to calm the market, trying to say, "Here's the next thing we're going to do. Here's the next way we're going to manipulate markets. Here's the next way we're going to inject, catch or buy your securities from you so they don't go down." Well, then what do you do? Well, what ultimately that points to is a kind of Japan-style, long-term malaise, given a commitment to effectively the diminishment of value of fiat currencies. And so what does that mean for us? Well, certainly, in the near term, different sectors differ to the degree to which they are really -- to which price discovery is going to be possible. And so as an example, in oil and gas, that had already been a real problem for 2 or 3 years before what we saw with COVID. And $400 million of value has been destroyed in that area. And a whole number of formerly involved stakeholders has now exited. And so that's the time for us to kind of do our proverbial lending a nickel against the dime and getting paid the kind of numbers -- the kind of returns that we want to. I think you're starting to see, as an example, early on, what's going to happen with commercial real estate. We saw in the second quarter banks largely, certainly in North America, having significant net interest margin and taking a lot of that into reserves. They know they already have very significant losses, and they want to obviously try to [indiscernible] kind maneuver their earnings over time in a relatively smooth way. And so we expect a lot more based on what we're seeing on the ground in terms of problematic real estate, whether that's in hospitality, in office, in sort of -- in certain areas within housing that are kind of moving in and moving out, in places where there's exposure to the consumer that has up till now mostly been subsidized by the government. There's a lot of change happening. And we're seeing -- and we really differentiate a lot of the sectors out there by the degree to which that price discovery will happen. So in the near term, we'll see that in energy, in aviation, in commercial real estate, in retail-related investments. In the longer term, it will start to flow through. There's a tremendous amount of what we would call amend and extend and pretend activity going on within leveraged loans, within ADS, mortgages, munis. Very, very bad fundamentals are papered over by other government intervention and/or amend, extend and pretend activity. And ultimately, the cupboard will we bare. The coupons won't be serviced. Price discovery will happen, and we'll be there. And we think that will happen over the next several years. And so it really sets up nicely against where we are in our business and our ability to scale and drive operational leverage.

Thank you. Thank you, Dan. And again, thank you, Andrew. Terrific overviews. It is worthwhile -- maybe Rob, if you could -- thank you. It's worthwhile to quickly refresh Westaim's strategy and how we view the platform. We note 6 tabs, and they are largely self-explanatory. The first tab, operating -- opportunistic investment, references that we are targeting a 15% IRR on invested capital. To our mind, our cost of capital is in the mid-teens. Given the abundant deal flow from Arena, we can quickly capture 9% to 10% returns. With moderate leverage, this can expand to 11%, 12%. When we include Westaim's share of Arena Investors' income, our IRR floats to the high teens. Therefore, for Westaim to consider a new acquisition with the inherent execution risk, we must achieve above average returns or why pursue? Next slide. This is an important slide. We believe we are now entering the third inning of our maturity and development. First inning was to source, acquire and fund 2 core businesses. The second inning was to build each company to a position of strong management strength, operational discipline and financial strength, all necessary pillars to be poised for sustainable and profitable growth. Hence, here we are, the third inning. We are positioned to execute on thoughtful growth, which will transition to demonstrating the earnings power of the Westaim platform. Andrew provided a good overview of HIIG and how he's positioning the firm to become a destination of industry talent, which will in turn drive HIIG toward our first quartile goals. Simplistically, the 3 levers to drive book value and earnings growth within an insurance company is: Underwriting profitability, and arguably, we have the most favorable pricing environment in 15 to 20 years; capital efficiency, which is really the intelligent use of employing debt, equity and reinsurance; and investment returns, a low rate environment makes it a challenge. In this case, Arena's contribution is helpful and meaningful. We are of the view that a first quartile company will command a premium valuation, which combined with excellent underwriting performance, is positioned to produce returns in keeping with our stated goals. Westaim's proprietary capital is invested largely in Arena FINCOs. Our capital has been the financial cornerstone used to build the Arena Investor business, allowing Dan and his team to attract the best talent, enable the business to scale and position the firm globally to seed debt levels above the peers. Earlier, Dan spoke of Arena executing on approximately $2.2 billion of illiquid transactions diversified among 189 transactions, with 91 maturing at 18% gross returns. Westaim gross returns have been lower due to cash drag, which has been material at times, and using our funds to seed new products, namely the offshore fund and the closed-end fund. Going forward, we do expect to employ modest leverage and credit facilities and expect our gross and net returns to meaningfully improve. Westaim's permanent capital is critical to our ongoing success. It is clear that all successful alternative managers of scale have embraced permanent capital to eliminate enterprise risk and to attract third-party fee-paying capital. Today's investors seek managers who are aligned and lead by example. As many of you know, Parag Shah is Arena's Managing Director of Marketing. And I ask Parag to share his experience as it relates to our efforts in building Arena's AUM. Parag?

Thanks, Cam. So a little over 2 years ago, I was extremely fortunate to join a team and a firm with incredible intrinsics in what is one of the most competitive industries in the world. Those facets for Arena are that Arena has true edge, a fully staffed senior team where every individual has decades of experience and a broader global origination network of partners and advisers that's been collectively built over nearly 30 years; a completely systematized process that's been hardwired into end-to-end proprietary systems; and the infrastructure and staff and scale to do what the mega firms essentially do in our space while staying true to the art of investing, which is generating alpha, meaning high, consistent, uncorrelated returns, characteristics that investors need now more than ever. And importantly, the stability and flexibility created by Westaim's proprietary capital base such that we have very strong alignment with our clients as well as an ability to seed new product offerings. So those facets are incredible points of differentiation. And the momentum that was there when I joined has continued and is evident in the engagement that we're receiving with investors and in our growing pipeline and assets under management, which you saw previously. And as Dan mentioned, COVID, while awful, has had a silver lining for Arena as a stress test of the billions of dollars that we have deployed to date and also creating a tremendous amount of continued going forward opportunities. And look, it's also great to be offering a strategy that investors are looking for, as investors turn even more to private markets and the strategies they can capitalize on a going-forward environment in order to meet their targeted returns. And as Arena has shown, its past results weren't simply a beneficiary of a one-way rising market tide. So we've had a lot of success thus far. We have even more white space, and I continue to look forward to sharing milestones with all of you, the next one being when we hit $2 billion in assets under management, which we're working towards. And so I thank you for your partnership with shareholders. And back over to you, Cam.

Thanks, Parag. In the previous slide, I referenced our ongoing efforts to employ moderate leverage at the FINCO level. Given our gross yields versus anticipated interest expense, the math is obvious. But it is the treasury management reducing the cash drag that will also contribute in a material manner to our returns. In addition, we are considering and reviewing additional strategic options, and I'll ask Dan to speak to a few of them. Dan?

Sure. Well, thanks, Cam. As we've talked about, we want to get rid of the cash drag. We want to appropriately capitalize our assets. Certainly, by virtue of the very thing that makes them strong, the heterogeneity of those -- of the holdings does make it more challenging at times to get financing because lenders who are more conventional lenders do like a relative consistency even if it's not ultimately in their best interest. And so we've spent a ton of time with folks who can provide very efficient and open-minded optimal leverage. But modestly, we're getting returns out of the investments. We're expecting return per unit of risk to come from the investment. We're not leveraged or seeking a way to leverage our way toward a return. But ultimately, that will mean that we'll be able to deliver yields on a net basis back to either LPs and privately raised funds or shareholders in permanently capitalized entities. And so I think we're making real progress on the balance sheet capital not only as a seeding function for some of the entities that we do privately. But also, we see an opportunity to create multiple publicly traded, externally managed entities that our shareholders are going to be beneficiaries of.

Thank you, Dan. Next slide, Rob? Thank you. This illustration highlights the leverage of the Arena business model. We are providing you 2 scenarios, which should allow you to model accordingly. A couple of takeaways. First, founders' fees were for our original investors. Our fees are moving higher, and we believe the distinct alpha returns of alpha performance will award a 2 and 20 formula. There are several examples of this in the market to be true. Also, like many of our alternative investment manager peers, Arena has introduced drawdown funds. Therefore, our posted AUM reflects capital that has been committed but not as yet to be drawn on. In time, with the emergence of follow-on drawdown funds and other products, the cadence of committed capital to fee-paying capital will slow down. This reflects many of the 6 attributes noted in the earlier slide evolving the platform. It also captures the third inning as both businesses evolve to growing consistent earnings. In particular, as a capital-light business, Arena Investors does not need to retain capital but is able to distribute to its shareholders. As such, Westaim's ability to explore other strategic options, such as buying back stock, issuing dividends or pursuing additional opportunities, will all become active considerations. Lastly, to remind everyone, as Arena Investors commences profit distributions, the Arena management team will start to acquire Westaim shares in the open market and will continue to do so until they are a 19.9% shareholder. We like our alignment. Our final slide really profiles a sum-of-the-parts analysis and how we are focused on the applicable levers and metrics in each business. Westaim is evolving into an alternative manager with a financial service and operational focus. Both businesses are maturing and, we believe, entering a growth and earnings phase. With this, we will focus on ways to unlock the difference between the intrinsic value and our share price. We believe there's no better way to create ongoing and sustainable value to Westaim shareholders than to build HIIG and Arena into best-in-class enterprises that provide their respective clients clarity, excellent service and results. Thank you. We welcome your questions. Rob, we'll open it up to you to serve us some questions.

Thanks, Cam. As Cam indicated earlier, on the platform, there's the ability to ask questions by typing them in and submitting them. I've got a bunch of questions in front of me. So I think we'll go down the list of questions and ask them to the respective parties. So the first question I have here is actually for Andrew. How confident are you that with the LPT, the vast majority of adverse development is now behind us? You're on mute, Andrew.

Yes. Apologies. Apologies. Hopefully, you can hear me now. What I can tell you is the headline is, my confidence is high. But the nature of the features of the long-term liabilities is -- brings uncertainty. The inputs to it are pretty straightforward. We have an actuarial view, which includes our internal actuary and an external actuary. And we've selected a reserve position at the second quarter that's above both our internal and our external actuary. And that should be a position of conservatism, a point I've tried to make throughout the course of my presentation. The other part of it is just the claims input. And working with Sean Duffy, we're able to have a quite sort of incisive view as to the sort of the developments of the claims and if there's anything there that we see that as a trend that can amount to future development. And what I would say to you right now is that I'm confident we've taken a prudent position. And I wouldn't say much more than that other than prudence is important when it comes to these things, particularly given that I took some action here with respect to the LPT in the second quarter that I hope I'll not have to touch again during my tenure.

Thank you. Following up on that, the next question, sort of it's a nice segue, after achieving a stable outlook from AM Best, what needs to be done for an upgrade to positive?

It's a great question. So I was part of -- well, I was actually responsible for the rating relationship in my prior life in Hanover and went through the process of going from an A- to a full A. And look, I think it's pretty straightforward. AM Best is going to look for consistent performance over a period of time. I think just like what we did with moving from a negative outlook to stable, there's responsibility that falls to me and the leadership team to make it easier for AM Best to act sooner. But I think in practical terms, to even get to a positive outlook towards a full A is not a 1-year or a 2-year process. And so we'll begin those conversations. In fact, we started those conversations as soon as we received the stable outlook that we'll be looking for sort of clarity on the progression towards A. And timing is not in our control. All we can control is the inputs. And so it's hard to really know how AM Best might view us specifically.

And the final one for Andrew for now until -- and then we'll move to Dan, how do you define top quartile performance in terms of underwriting profitability?

Well, there's an absolute answer but with some caveats. If you look back over the course of the last 25 years or so, top quartile performance for the commercial insurance industry tends to translate to about a 94% combined ratio. And it's about a 10% or 11% return on capital is where the line is drawn, not the average of the top quartile performers. I will say we're in a very different environment now. Interest rates are at all-time lows. New money is -- it's being put into a standard investment portfolio, is earning 1.5 points yield. And so if companies don't alter their investment strategy for our industry, there will be tremendous pressure on what that means both in terms of what top quartile looks like and what top quartile combined ratio requirements are. But I think if you want a general reference, those are 2 macro numbers. I think for us, it's very much depending on our portfolio, and we look at it line of business by line of business. And we target a combined ratio by line of business based on top quartile for that specific line. And that's how we set our goals internally.

Great. Thanks, Andrew. A question for Dan. Dan, please speak to the thinking behind the New Zealand real estate fund. Why structure a vehicle focused on one specific asset class when Arena is focused on being highly diversified?

Well, our strategy as a business is, in fact, within our flagship [ business ], what we've done traditionally, and that goes back to my prior firm as well, is when we find something that is particularly compelling and are able to sell that to investors and say, by the way, this is not in any way diversified, this is a particularly compelling thing, we at Arena have already bought the amount that we can while still maintaining the level of diversity that we have in our flagship areas. But there's this excess capacity that we think is very compelling. And that's where it happened to be. I would say that we're happy to go offline with anybody about that area, but it's a very unique situation where we have very unique edge and is a very scalable opportunity for us.

Thanks, Dan. Another question: Performance has been strong. And now that you have a longer-term track record of performance, are you able to target more meaningful new mandates?

Well, let me go at it, and I'll leave it to Parag in terms of the mandate. As we talked about, we've already set the basic infrastructure on the right side of the balance sheet here. And so going one by one, in our permanent capital from Westaim, we see that as a model for other similar types of entities that we can manage on a permanently capitalized basis and are having discussions around those. In our open-ended, we can simply just try to drive more and more growth. We are close to getting those appropriately capitalized and also bringing the offshore to scale. In our SMAs, for -- now that we have the substantial capabilities and substance that we do, particularly for large-scale insurers, we are very mindful that there are opportunities to be -- given the mandate to do very chunky SMAs with large-scale clients that we can deliver on now. And they can have confidence in us in terms of the scale and capacity that we've achieved. And then with regard to our drawdown, we have fund 1 in the bag. Those are 2-year in, 3-year out entities [indiscernible] you will see [ fund number ] 2, 3, 4, and so on as well as the things that we're doing within the fee income account as well and the New Zealand and excess capacity capability. Parag?

Yes. And just specifically on the mandates, our founders class and those larger investors, that was a regime and an incentive that was offered until about 2018 when I joined. Since then, we have been moving up in mandate size. We've been targeting a broad swath of different institutional investors across the spectrum. And if you looked at our closed-end offering, the average investor in that structure was about $50 million. So it's a good sort of metric on what we're able to attract and how we've been growing in that. And I think the appeal was broad, and we should continue to see that going forward.

Thanks, Parag. Dan, can you talk about, in a bit more granular detail, the performance of the portfolio sort of through the COVID initial short-term impact and then sort of a bit more granularly on the longer-term impact and where you're targeting going forward?

Sure. Going into COVID, as I mentioned, we had asked ourselves, how do these investments feel in an '08 scenario? And I would say we felt very good. Is anybody -- is there anybody out there who has 0 exposure, including us? No. But the levels at which we had those exposures were very, very low. And we were very pleased about that because we avoided a lot of these areas that were kind of crazily bad from a risk-reward perspective. We did -- we were -- our entities were kind of flattish around that time. Some of that is related to perhaps the extension of cash flows that are going to come anyway. Some of that is some remediation that we had to do in terms of workouts, et cetera. But I would say relative to what I had talked about with amend, extend and pretend, we have none of that. And there's nothing about our portfolio that we know today that we didn't know in the third week of March. There has been no change. We went right at any issues and felt very good. Keeping in mind that when you're -- on average, you have 35% capital cushion below you and anything, it means that there are certainly some assets that were hit. It's just that we -- given where we were in the capital stack, we're not there in front of it. On a moving forward basis, as I've mentioned, I think we will see these waves of different areas where price discovery will happen. We are firmly convinced that in areas particularly that are touched by or where investment grade-level investors are involved and also with regard to consumers at the very end of the spectrum, there's a lot of government involvement that has precluded appropriate price discovery. But ultimately, as we've discussed, in different areas, there's only so much that can be touched. Those -- that involvement in the marketplace can't create NOI, can't create EBITDA. And then there are a lot of areas where that is showing up, and we're [ on our own ].

Thanks, Dan. Andrew, you talked in your presentation about shorter-tail and longer-tail lines of business. If you think about over the next 1, 2, 3 years, that mix and where you would expect it to go given the context of the environment, how would you think about that as part of HIIG's business?

Well, look, I really like the fact that we have a balanced portfolio between short tail and long tail. And so some of this will be at the margin in an aggregate sense. Clearly, today, there's certainly been an intense hardening of the market on the short-tail business. And so in practical terms, it's easier to deploy capital there and see your way to attractive returns. I think on the flip side, the impact of the years of the soft market and now compounding with just the realities of the investment environment, we'll have to create some additional sort of impetus on the longer tail, the liability businesses to see sort of this progression on pricing. And so if I look out 2 or 3 years, I actually would expect there to be more opportunity on the liability side of the business just simply because of the things that are cumulatively happening on historical sort of soft market combined with just investment yields will force higher prices on the underwriting side. And that's a great thing. And we're leaning into both incredibly hard. And right now, I feel positive on both dimensions.

Thank you. If you have a question that you'd like Dan, Cam, Westaim or Andrew to answer, please provide the question through the interface. And we'll try to address as many as we can. When we -- Andrew, when we talk about capital and you talk about the mix of reinsurance, equity and debt, how do you think about that as you sort of just grow the business moving forward over the next 3 to 5 years?

Well, look, I mean, I think ultimately, we're just -- we're simply trying to drive to the highest return on equity that we can achieve fundamentally, right? And so where we have opportunity to put debt leverage into the business as opposed to equity capital, we're going to do that. The question of reinsurance versus -- using reinsurance versus retaining risk is just fundamentally a question of how do we feel about the additional allocation of capital to retain that risk. Is it attractive returns? What does it add to our volatility, et cetera? And that's not sort of just a simple kind of discussion and a simple answer. It's one of those things that's at sort of the core of how it is that we look at our enterprise capital management, and we're making those decisions as part of our business planning cycle and as we think about new categories that we want to enter into. So -- but in the end, it starts with a goal towards maximizing our return on equity capital and trying to minimize disruption or minimize volatility by not sort of being over-lined in any particular area. And I think that as an organization, we do it well, and we're getting better now because it's become a principal focus of our decision-making on capital deployment.

A question for Cam. In 2017, we -- Fairfax did an investment in preferred security. And we elected at Westaim not to -- we took the first $50 million. We elected that we didn't need the back $50 million. Just wanted to -- shareholder wants to understand, what was the situation there?

In 2017, when Fairfax approached us, really, what that transaction did was it did provide some additional capital to augment the Arena business, in particular. But it really sent a note of affirmation, if you will, to the insurance industry on securing such a coveted partner and a line partner. And the aspect that doubling down and taking it up to $100 million, it would have caused us more dilution. We didn't really need the funds, and we thought it presented the alignment that we wanted to secure and start building a relationship with Fairfax. That dialogue and our relationship with Fairfax continues, and we look to expand it and let it -- continue to grow it through time.

Thank you. There's a question about the HIIG's investment portfolio in the large cap domestic equities and using that portfolio to buy Westaim shares. I'll take that question. There are significant regulatory hurdles for a regulated insurance business to acquire shares of an affiliated parent. So it really is not something that can be done in any type of scale. Question for Cam. Re: buybacks, help us better understand your thinking. The stock is already suffering from lack of liquidity and a small float. Won't buying just aggregate this further? Also, help us understand your thoughts with acquiring another leg of the stool beyond HIIG and Arena from a size and industry and characteristics perspective?

Sure. People like to kind of categorize you and frame your business from a comparative perspective. In times, we've often drawn upon Westaim must be an example of White Mountain Advisors, that early on in the '80s, a gentleman by the name of Jack Byrne founded of this company, who really was opportunistic on equity investments, both in insurance and in money matters. Good allocators of capital, they were judicious on the way that they allocated it and executed. And from their perspective, they looked at taking their cash flow, and they considered additional investments, but they also looked at their own stock. And through the passage of time, they ended up acquiring in excess of 80% of their shares and buying it in. Through a 30-year time frame, we watched that share price go from the mid-teens to over $1,000. In our particular case, we talked about today's presentation about us entering into the third inning and that Arena is a capital-light business. Arena Investors in the not-too-distance future is going to be -- start disbursing profits back to all its stakeholders, including Westaim. And that cash flow really gives us a lot of options. Whether we exercise that option to buy in shares, to issue a dividend or to consider other investments, and certainly, we would look at -- one of the byproducts, I think, of the Arena business that showcased us over the 5 years is while the returns have been certainly above our expectation and that flow has been above our expectation, in many ways, what we are seeing is opportunities or branches of Arena from this transaction that come in here. So could it be other alternative manager strategies being, again, asset-light that we could employ, that would complement the existing frame and what we're trying to achieve? We think so. In many ways, in the alternative market, Westaim is focusing on aligning ourselves with our principal capital, with third-party fee-paying capital and really focusing on the shorter duration market. A lot of the alternative managers currently are focusing on longer duration. And if you can find the constant flow focusing on the short-term environment, an opportunity is really compelling.

Thanks, Cam. For Dan and Parag, frankly, we talk about AUM as the driver of performance and provided some illustrations, obviously, discussed the momentum and the platform being fully built out. Generally speaking, what are your expectations over the next 2 to 3 or 4 years as to AUM? Where do you expect that to come from, both investors as well as products?

Yes. I think it's worth -- it's hard to speculate on AUM. Although my sense is that certainly in my prior business and in this environment, the first billion is always the hardest. And it goes down from there significantly. And by virtue of the fact that we are adding successive versions effectively of the same pools as well as adding to those very same pools over periods of now 3-year and 5-year performance, it seems to us to get kind of a little bit easier each time. I would point out that it really is kind of a 3-pronged analysis. Part of it is, yes, the AUM dollars that come in. Part of it is the margin you get on those dollars, and we spoke to the barriers to entry. There is a type that could be paid for -- to folks who are giving you that first dollar for that first fund and so forth. And ultimately, we would seek to -- we would expect to see our margins moving up over time from that. And then finally, it's the ability to appropriately capitalize these entities and eliminate cash drag so the net investor, that on a net-net basis, net of the appropriate full-size fee schedule, get the type of returns that he or she should get. So all of those 3 work together and are [indiscernible] confident that we're going to see more to come.

Thank you. We have a question about -- for the U.S. investor, is Westaim considered a passive foreign investment company or PFIC? I'll take that. The answer is no. We do the test on an annual basis. And at this point, it is not a PFIC. The insurance company ownership is instrumental in that given the way the tests are calculated. A question for Cam, I guess, and Dan. Westaim has placed a value of $11 million on our interest in the Arena GP. Do you think that this is the right mark? I'll just start out by saying we don't place a value of $11 million on our interest in the Arena GP. It's equity accounted, so that happens to be the book value of that particular business. It's not fair value accounted. But Cam, do you have any thoughts on that?

Well, actually, I suspect the question is, do we think it's probably understated? And given that the current equity value is represented as debt owed, it's actually going to go down. As Arena investors starts to make disbursements, the final resting place on our book value is probably going to be around just under $250,000. When you look on a go-forward basis, what is the value of an alternative manager? I go back to really our concluding comments being that we're very much interested in creating a constant earnings stream, and that is going to be done by just pursuing a very diversified client base and being consistent and excellent at what we do.

A question for Andrew. With respect to reinsurance and the reliance on reinsurance and the current state of the reinsurance market, and in the past at Investor Days, we've talked about arbitrage and reinsurance and how do you -- how does your vision with respect to reinsurance and your philosophy around that shape up moving forward?

Well, listen, I think it's very important for me to just say right at the outset, as a company, we're a gross line underwriter. And what that means is, is that we need to earn an underwriting profit regardless of what we take in that. That's just philosophically critically important. I think it's impossible for a good insurance company to thrive through the cycle without being a gross line underwriter. That was a great example where reinsurance is becoming very costly, and it's tight. And unless you're earning a profit for your reinsurance partners, it's just not -- it's not a place to be. And look, I think our decisions on reinsurance are pretty fundamental decisions. One has to do with ensuring that our business is well diversified. You can use reinsurance as a way to lay off if you're over-lined on something. We use reinsurance as a way to manage our volatility. But our goal here is where we can earn an acceptable return on our capital, we want to keep the risk, and it starts with that. And if we can do it without over-lining in an area or adding additional volatility into our business, we'll do that. But along the way, I think we'll earn a good return for us and our investors and hopefully equally for our reinsurance partners because we look at things on a gross line basis.

Thanks, Andrew. Just looking through if there's any other questions that are suitable for the forum and that we require -- some of them require a more detailed answer, and I'll follow up with them directly. Yes, I think that covers the questions we have so far. If there's any additional questions, please fire them through. The presentation that you've seen this morning will be posted on Westaim's website after the presentation. So with the absence of additional questions, Cam, I'll throw it back to you.

Thanks, Rob. Just to echo my opening comments, one of the casualties of doing this virtually is we miss the interaction of the in-person meetings of years past where at the conclusion here, you can mingle with the variety of management teams, so all 3 organizations: Arena, HIIG and Westaim. So for those of you who would like to have a direct follow-on dialogue with anyone in particular or a collection, please let us know and we'll facilitate that. We want to make this as best of an experience as we can. Other than that, we hope that you've found today's review helpful, informative. Certainly, the takeaway would be going back to we're the in third inning. We believe now we're in a position of good growth. We like the trends and the winds, if you will, at our back. But it's day-by-day execution and a lot of our hard work. Thank you for participating, and we look forward to speaking with all of you over the near term. Stay safe, and speak soon.