Q3 2019 Earnings Call
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During the call today, we may make forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
They are based on current assumptions and opinions concerning a variety of known and unknown risks actual results may differ materially from those contained in four suggested by such forward looking statements.
Additional information about factors that could cause actual results to differ materially from those projected in the forward. Looking statements is included under the captions risk factors and the safe Harbor in cautionary statement and our most recent annual report on Form 10-K , and quarterly report on Form 10-Q .
We may also discuss certain non-GAAP financial measures in the call today.
Okay Fine you may find the most directly comparable GAAP measure and a reconciliation to GAAP for these measures in our Form 10-Q , which can be found on our website at www Dot Markel dot com in the Investor Relations section.
Please note. This event is being recorded I would now like to turn the conference over to Tom Gayner Co Chief Executive Officer. Please go ahead.
Thank you Karen and good morning.
Tom Gayner I'm joined this morning by my co CEO , Richie Whitt and our CFO Jeremy note and it's our pleasure to welcome you to the Markel Corporation third quarter year to date 2019 financial update call.
The purpose of this call is to connect with you our owners and to provide you with an update on our financial performance through the first nine months of 2019.
We'll also offer some commentary about current events and circumstances around Markel. We also look forward to any and all questions you'd like to ask us about your business.
We're pleased to report positive results through the first nine months of 2019.
Over the years, we've spoken about the three engines, we have at Markel, namely insurance investments and our diverse Markel ventures operations. Each of those engines provided positive thrust is the first nine months that it's always fun to see and report.
Now sustainability is a word one here is a lot. These days, we've been saying it for years.
We believe that sustainability stems from our values of treating our customers our associates and our shareholders. The best way, we know how each and every day with no exceptions.
We believe that the sustainability of Markel stems from our diverse and successful three engine architecture, which provides multiple ways to be resilient and robust through all sorts of economic environments and individual business unit challenges.
There are always external and internal business challenges always have been always will be at markel, we've always risen to those challenges and we always will.
To meet those continuous challenges, we remain dedicated to the proposition that to into equal for.
We also believed that it is a good idea to be able to count to 100.
We regularly observe occasions in financial markets, where others seem to forget those principles.
Some folks seem to have the ability to suspend them for a while I can jump and suspend the effects of gravity for a while not very long, but I'm under no illusion that gravity doesn't apply.
Rest assured that we have markel always remember the two into does the report.
Gravity implies and it's a good idea to possess the ability to count to 100 at Markel you want to see a stop counting before we get to 100 and you know that if we go beyond that something is wrong.
Years like 2019, so far and more importantly, three decades as a successful public company demonstrate the sustainability and resilient created by adherence to these numbers and the principles behind them.
At this point Jeremy will update you on our numbers through the first nine months Richie will then pick up with some comments on our insurance reinsurance and insurance like Securities operations, and then I will update you on our investment in ventures operations. We will then take your questions with that as intro I'll turn the call over to my friend and colleague.
Terminal.
Thank you Tom and good morning, everyone.
As you just heard from Tom the third quarter was really a continuation of the themes discussed a quarter ago as all three of our operating engines made meaningful contribution to our results in the first nine months to 2019.
We produced a meaningful underwriting profit despite catastrophe losses during the period and we're seeing profitable growth in both our underwriting and Markel ventures operation.
And Thats been performance through the first nine months. The 2019 was excellent and our investment portfolio continue to make meaningful contributions to both net income and comprehensive income.
But first nine months in 2019 total operating revenues grew 20% to $6.9 billion compared to a year ago. The increase was driven by just over $1 billion of net investment gains primarily due to the increase in the market value of our equity portfolio. During the year. Additionally, revenues from Markel ventures segment income.
Just 9% year over year and earn premiums across our underwriting segments increased 6%.
Looking at our underwriting result, gross written premiums were $4.9 billion for the first nine months to 2019 compared to $4.5 billion in 2018, an increase of 10%, which was attributable to higher gross premium volume in both our insurance and reinsurance segments.
Retention of gross written premiums increased one point from 83% in 2018% to 84% in 2019.
This increase was driven by an increase in net retention within the insurance segment, resulting from recent changes in our outwards reinsurance treaty structures.
In late 2018, we shifted from buying proportional reinsurance coverages towards excess of loss coverages for our general liability in professional liability product lines, which resulted in higher retentions.
These increases in net retention were partially offset by lower retention, our personal lines business.
Earned premiums increased 6% to $3.7 billion for the first nine months to 2019 due to higher written premium volume in our insurance segment, partially offset by lower earnings in our reinsurance segment.
Our consolidated combined ratio for the first nine months of 2019 was a 95% compared to 94% last year. The increase in the consolidated combined ratio was primarily driven by lower benefit from favorable development on prior years loss reserves, partially offset by lower underwriting losses arising from catastrophe.
Our 2019 combined ratio included $43 million or one point of underwriting losses from Hurricane Dorian and type in fact side compared to 2018 combined ratio, which included $76 million or two points of underwriting losses from hurricane floors and talk when Jeff.
Now I'll cover the results of our Markel ventures segment revenues for Markel ventures increased to $1.6 billion year to date compared to $1.4 billion a year ago. The increased revenues reflected higher revenues across our product businesses driven impart by our fourth quarter 2018 acquisition of Brahmin leather works.
EBITDA for Markel ventures was $219 million for the first nine months of 2019 compared to $128 million last year, our strong EBITDA. Thus far in 2019 has benefited from improved operating results within our consumer and building products businesses.
Turning to our investment results net investment income increased from $320 million from the first nine months to 2018 $339 million this year.
The increase was driven by higher dividend income due to increased equity holdings and dividend rates and higher short term investment income due to higher short term interest rates compared to the same period of 2018.
Net investment gains included in net income were $1.1 billion for the first nine month to 2019 compared to $408 million a year last year.
As I mentioned earlier substantially all of our net investment gains in 2019 were attributable to the increase in the fair value of our equity portfolio during the period.
Net unrealized investment gains increased $330 million net of taxes. During the first nine months to 2019, reflecting an increase in the fair value of our fixed maturity portfolio, resulting from deposit interest rates over the same period.
Given our long term focused variability in the timing of investment gains and losses is to be expected.
Looking at our consolidated results for the year, our effective tax rate was a 22% for the first nine months to 2019 compared to 32% to comparable period a year ago.
As I've mentioned previously the impact of management's decision to elect to treat two of our UK subsidiaries as you a tax payers beginning in 2018 added $102 million were 11% to the 2018 effective tax rate our estimated annual effective tax rate, which excludes this impact in 2018 as well as certain other items that are infrequent.
Or unusual in nature was 21% in 2019 and 20% in 2018, we reported net income to shareholders of $1.3 billion for the first nine months to 2019 compared to $623 million a year ago and comprehensive income to shareholders for the period was $1.6 billion compared to 305 million down.
As a year ago.
Finally, I'll make a few comments on cash flows capital and our balance sheet.
Net cash provided by operating activities with $712 million for the first nine months of 2019 compared to $763 million for the same period 2018 operating cash flows for 2019 reflected higher claim settlement activity and higher income tax payments compared to 2018 also reflected a net cash provided by operating activities.
For 2019 were higher premiums in our insurance segment.
Invested assets at the holding company were $3.3 billion at September Thirtyth 2019, compared to $2.6 billion at December 30, Onest 2018.
The increase in holding company invested assets was due to financing activity this year, including the issuance of $1.4 billion, an unsecured senior notes 800 million of which occurred in the third quarter. We used a portion of these proceeds to repay $235 million of unsecured senior notes that matured in September we all.
We have purchased 223 million a principal amount of our 2020 2021 unsecured senior notes via tender offering and subsequent to the quarter closed in early October redeem the remaining outstanding balances on these series. The net effect of these various finance activities will position the company to maintain a debt to total capital position.
In the mid Twentys, while meaningfully extending the duration of our debt maturities all historically low interest levels.
Total shareholders equity stood at $10.6 billion at September 32019, and increased 17% from year end.
We repurchased 78000 shares in the first nine months of the year pursuant to our share repurchase programs with that I'll turn it over Richard to talk more about our underwriting and I'll ask results.
Thanks, Jeremy and good morning to everyone.
Today I'll focus my comments on our underwriting operations and ill also provide brief updates on our state National program services and insurance linked securities operations.
Headlines for the first nine months includes solid underwriting results combined with strong premium growth, resulting from a combination of organic growth and improving price momentum.
We also continue to be pleased with the progress we're seeing from our state national in the fill operations.
So I'll kick off by starting with our insurance segment gross written premiums for the quarter are up 170 million or 14%, 14% compared to the third quarter of 2018.
For the first nine months premiums are up 404 million or 11%.
Premium growth for both the quarter end. The first nine months was driven by continued organic growth across several several product lines, most notably our general liability professional liability and personal line products. Also there was obviously price increases involved in that earned premiums for the segment are up 10% for the quarter.
And 9% for the first nine months with similar drivers as the gross written premium increases.
The current the combined ratio for the insurance segment was nine two for the third quarter of 2019 compared to 96% last year.
The four point decrease in the combined ratio was driven by lower catastrophe losses in the quarter compared to 2018, a more favorable development on prior accident year loss reserves.
The increase in favorable development on prior accident years losses was primary delivered record driven by more favorable development in our professional liability and general liability lines.
Higher earned premiums in the quarter had a favorable impact on our expense ratio and an unfavorable impact on our prior years loss ratio.
The combined ratio for the first nine months for the insurance segment was 94% compared to nine 2% for the same period a year ago with the increase is driven by less favorable development on prior accident year losses. This was partially offset by lower catastrophe losses in 2019 compared to 2000.
In 18.
The decrease in favorable prior year loss reserve development was driven by our marine and energy specialty programs and property product lines.
Similar to the quarter higher earned premiums for the first nine months had a favorable impact on our expense ratio and an unfavorable impact on the prior years loss ratio.
Next talk a little bit about the reinsurance segment gross written premiums for the quarter are down 8 million or 3% compared to the third quarter of 2018.
On a year to date braces premiums are up 28 million or 3%.
The premiums declined in the quarter was driven by non renewals and lower gross written premiums are multiyear contracts, primarily in our product prob property product lines.
Partially offset by growth in our walk workers compensation line due to favorable premium adjustments on a significant treated.
Premium growth for the year was driven by our workers compensation line due the favorable premium adjustments I just mentioned.
And by our general liability lines due to a favorable impact from timing of renewals.
Significant volatility in gross written premium volume can be expected in our reinsurance service segment due to individually significant deals and the timing of renewal or multi year contracts.
Earned premiums for the segment increased 7% for the quarter and decreased 3% for the first nine months.
The increase in the quarter was due to gross written premium increases in our workers compensation line.
Partially offset by higher ceded earned premiums, resulting from changes in our outwards property reinsurance structures.
The decrease in earned premium for the year was due to the runoff of earned premium from two large specialty quota share treaty that were non renewed.
And higher ceded earned premiums, resulting from changes in our outward property reinsurance.
The combined ratio for the reinsurance segment was 103% for the third quarter this year compared to 115% last year.
The 12 point decrease was driven by lower current accident year loss ratios and expense ratio.
The decrease in the current actually your loss ratio is primary demand driven by more favorable premium adjustments this year and lower catastrophe losses than in 2018.
The decrease in the expense ratio was driven by lower gionee costs and profit sharing expenses and the favorable impact of higher earned premiums in the current year.
The combined ratio for the first nine months for the segment was 99 versus 100 for the same period last year. The one point decrease was driven by lower current accident year loss ratios, partially offset by higher expense ratio.
The decrease in the current years loss ratio.
Was due to lower catastrophe losses, the increase in the expense ratio was driven by higher ceded earned premiums resulting from changes in our outward reinsurance.
Next I'll touch on our program services operations gross written premium volume from our state National program services operations were up 11% and 15% respectively.
From the same periods last year, driven by organic growth across our organic growth across several existing programs.
As a reminder, almost all of this gross written premium is ceded to third parties.
Seeding fee revenues were up 26% and 18% on the quarter and nine month basis from last year due to continued gross growth in premium volume of volumes over multiple quarters.
We're very pleased with state Nationals continued strong operating performance. In addition, and as we expected state National continues to prove strategically important to fulfill and our overall iOS strategy.
Next I'll discuss iOS operations.
With the completion of the fill acquisition in November 2018, we significantly increased Markel iOS operations.
Nephila and Markel Catco operations, we have approximately 13.5 billion of net assets under management as of September Thirtyth 2019.
Total revenues from our iOS operations were 55 million in the quarter and $159 million for the first nine months of 2019 versus 18 million and $53 million for the same periods last year.
The increase in revenues in both periods is due to the contribution in revenues from the Villa acquisition, partially offset by lower revenues from Markel Catco due to lower.
And a reduction in management fees charged on side pocket shares.
Operating expenses for both periods were impacted by cost associated with the internal review of matters at Catco and related litigation costs.
The effects of these were more than offset by lower retention and incentive commission costs in 2019 compared to 2018.
There are number by the other items that are creating a complicated picture of iOS results for 2019.
Related to Nephila, while the overall operations of profitable the impact of purchase accounting adjustments on operating expenses and lower than anticipated management fees and associated delayed fee recognition on side pockets arising from the 2018 catastrophes negatively impacted report.
Adding reported performance shifting through the noise caused by these items to fill is broadly on top on target to meet our expectations from the beginning of the year and continues to take a disciplined approach to long term value creation.
Related to Markel Catco runoff of the business and the associated costs of the internal review and litigation have resulted in a net loss for the first nine months of the year.
Amounts from our program services and iOS operations, our reported within services and other revenue expenses within our operating results.
Next for a few comments on market conditions.
Im afraid my commentary is going to borrow heavily from what I've said the last couple of quarters.
The themes that I've been mentioning throughout the year continued into third quarter.
Market conditions continue to improve in an incremental fashion, we continue to see month over month price improvement in most lines. It's very clear that the market is in transition carriers are relax that reassessing their expectation for cat frequency and severity.
Given the events of the past now three years.
And professional and casualty results.
Meeting rate increases after several years of decreases.
We continue to see month over month acceleration in the upward pricing trends.
There has been much discussion of increased claims trend I think recently, it's been referred to as social inflation and whether rate increases are keeping pace.
Really this this is going up thats going to be a different answer depending on the line of business and it's going to take some time to have definitive answers.
Our sense is that professional in casualty lines need rate increases to account for increasing claims strander social inflation.
It would be foolish to assume that all price increases are going to fall directly to the bottom line.
I think I'd, just like to say here social inflation is not some new trend. This has been going on since insurance started quite honestly and it tends to go in cycles.
We have seen this before we have to be very vigilant and we understand that but we also are confident that this this cycle that we're currently in is manageable.
Similar to last quarter, the only major line, where pricing is declining is workers compensation as result of its good results over the last several years and highly regulated nature. We believe that workers compensation is still profitable, but obviously with rate decreases the margin margins that we've enjoyed in that business over the past several.
Years are shrinking.
We remain cautiously optimistic that this incremental rating improvement will continue during the rest of this year and during 2020.
So in summary, we're feeling very good about the underlying performance of our underwriting iOS and program services operations for the first nine months market conditions continue to improve and we're growing profitably across our business as a whole.
We remain intently focused on finding ways to leverage Mark Hills unique set of test capabilities for our customers.
Thank you for your time today, and now I'd like to turn things to Tom. Thank you received.
We enjoyed wonderful results in both Markel ventures and in our investment operations. During the first nine months of 2019.
So far were up 20.3% and our equity investments and 6.9% in fixed income.
The total return for the portfolio after subtracting out foreign exchange movements and investment expense was 10.9% that is a great full year return and well beyond my expectations for any given nine month period.
The main message that I wish to share with you is that we continue to be as disciplined as we know how to follow our long standing for part investment philosophy of buying businesses with good returns on capital and not too much debt run by management teams equal measures of talent and integrity with reinvestment opportunities and or capital.
Discipline at fair prices, it's the way we work always has been always will be.
In recent days and weeks headlines featured amazing stories of companies where to put it one way their investors funders might not have been following the same sort of disciplined to make decisions. We do not and have not owned any of the names, which have about which I've read entertaining stories in the last few.
And our fixed income operations, we earned a total return of 6.9%, which is well in excess of current coupon rates on offer for high quality fixed income securities.
We benefited from positive price marks on the bonds. We held we continue to be very wary about investing in long duration bonds. We continue to build up liquidity and forego. Some current income because we think it's more important to protect our balance sheet and the event of rising interest rates or any financial market dislocations.
At Markel ventures, we set new records in revenues and EBITDA revenues equal to about $1.6 billion. During the first nine months of 2019 and EBITDA of 219 million gives a vivid picture of the size and scope as well as the profitability of our Markel ventures operations.
We continue to enjoy strong results from our industrial businesses, where we expect cyclicality.
Those businesses continued to perform well both due to their own efforts and management expertise as well as the continuing favorable economic environment. Our companies that tend not to be as economically sensitive also continued to grow and performed well and we're gaining ground in some spots, where we had round to gain.
All in all I just want to thank you the shareholders my colleague and our board of directors for your patient confidence that we were indeed, making good capital allocation decisions as we work to build Markel ventures, it's delightful from need to be able to report to you overall solid organic growth and the double digit.
Centers EBITDA profitability.
The environment to add new companies to Markel ventures remains tough as valuations continue to be high across the marketplace. Fortunately, we continue to enjoy organic growth opportunities within many of the businesses. We already own also our track record of financial performance, along with our values based long term of.
Roche continues to cause people to seek us out about the possibility of joining the Markel family.
We will keep working diligently on what we have and will remain open minded and flexible as we consider growth opportunities.
We believe that our balanced steady disciplined and unrelenting approach to build our portfolio of partially owned businesses a publicly traded stock alongside building the value of the Markel ventures majority owned companies combined to work as designed to build long term value for all of us at Markel.
And by all of US I mean, our customers our associates and our shareholders.
We continue to strive to build women's worlds, great companies and that means run and company with win win win opportunities for all involved.
Thank you for your confidence in us and support as we do so with that thank you again for joining us today and we'd now like to open the floor for your questions.
Eric.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
We are using a speakerphone. Please pick up your handset for pressing the keys to withdraw your question. Please press Star then tail at this time, we will pause momentarily to assemble our roster.
The first question will come from Phil Stefano Deutsche Bank.
Yes, Thanks, and good morning for the Cat losses do you have a breakout you can provide between Dorian inside.
We added.
We can split that out in the in the in the 10-Q, but it's obviously a $43 million in the period and that side.
Little bit more weighted towards Dorian.
Yes look of the reason I ask and I sold in the queue that you had the up the Hagibis estimate range out there I realize it's very early days, there's a lot of uncertainty, but it felt like the market share on Hagibis was was higher than than Sag side.
Wondering is there anything inherently different about these exposures or whether aggregates covers trips or.
Maybe something different in the reserving process just felt like they were similar storms with a.
Just similar market share.
And losses that we would expect on your results.
I would say probably the biggest differences just the lack of time to analyze hagibis.
And and also just the the blood component the flood component there is massive and is going up and I'll just throw and one other thing hagibis coming into a relatively similar area right. After fact side that is going to be a complicated storm to adjust and so.
I think more than anything where we are.
We're just trying to be conservative in terms of what that thing could potentially look like yes, but I would add to that I mean, the preliminary industry loss estimates for hagibis as certainly greater than.
Factiva of both of those are pretty recent events, we have very sort of initial estimates are styles as well as across the industry, but as you get into larger size event. The set that we buy at higher sort of the Patrick was a higher layers, we could get sort of a higher amount of exposure, but to Richard's point really a broad range. This.
Say, it's out there we will put a finer estimate on that obviously in the fourth quarter.
Okay. Thank you and I appreciate.
The forward looking about many companies have given us at least.
And estimate at this point so I do appreciate it.
Looking at the reinsurance underlying loss ratio feels like it's had some volatility to it and commentary on the path I think has suggested that.
The changes in the outwards reinsurance is causing some choppiness and probably as we get towards the end of this year, we'll get a better idea what the steady state is going to look like do you feel like you have the sense for what the study.
Steady state is pushing pushing towards at this point.
No I think you think you're right there, Phil and I think as we get a little closer to the end of the year, we'll have a better sense, there's been a lot of moving parts.
Obviously, we change the reinsurance structures.
We have been.
Pricing for property has gotten better as a year has gone on but early in the year, we were a bit disappointed with property pricing and so we wrote less.
And actually we wrote seeing improvement in casualty, we were shifting a little more towards casualty. So mix is affecting it the change in the reinsurance is impacting it and also we've had some movement in the prior years that we've talked about so it's it's a little hard to pin right now I do think towards the.
We ended the year, we'll have a better sense.
With the the full year 19 number being good.
Wait to think about forward.
I think.
I think so.
But for prior year.
We've had a little bit of noise in the prior year. So I think the full year number would be.
A better proxy and that would reflect some of that shift from property into the casualty and specialty lines and Phil. This is Tom I want to jump in this is not the question you're asking but I think it's a really important point to make and it relates to our capital allocation framework and those comments I made about counting too.
100, I think when the beautiful things about Markel is the architecture, where we have a lot of different things, we can do and reinsurance in in of itself as volatility there commodity like aspects to that business, we fully understand that but were participants in the business, we see flow and I think we have some reasonably good sensitivity.
Then when prices are attractive we are positioned to write more of it and when they are not we're in a position to write less and what that does over cycles as it provides us with lumpy, but real capital the comes back into the Corpus up Markel, which we then make capital allocation decisions looking around the horn of everything we do.
To see where the best place to put that capital list. So we're not depended upon reinsurance, but it is a wonderful thing arrow to have in the quiver of that drives overall returns at Markel.
Got it thanks.
Maybe to follow on that so where are we in the capital allocation process.
Hi.
As of ventures, still appealing or have valuations gotten away from you.
With pricing that we're getting on the insurance side of the house.
Is it makes sense to allocate capital there.
How are you thinking through the current environment and what we've seen in the movement MP pricing versus insurance pricing right well capital allocation process as a continuous process minutes Thats, what we do all day everyday and we're looking at as the opportunity set of the things that are already within the house and everything else that we see so thats been.
Ram covers the whole world.
You're correct in sensing that given what's happening in the insurance market. Our favorite thing to do is allocate capital to proven underwriters within the organization to produce profitable books of business because that ended up itself generates capital for everything else.
The same time, so that that's the first thing we always look to do and we are experiencing the opportunity to do exactly that right now you're correct.
In the commentary made about pricing to expand Markel ventures, that's been the case for three maybe five years now.
We have done one deal a year I think over the last couple of years and those have been inbound calls where somebody called us and there were various reasons.
Beyond just a bidding contest as to why those organizations wanted to be part of Markel and there and they're working on right. We're not participating in auction processes of bids right now because.
That would.
Prices are just too high so unless there's some reason somebody wants to be part of Markel, where we're not going to.
Succeed in the in the circumstances, such as that but we are continuing to engage in conversations with people who care about the long term value creation and future their business and their unique opportunities and it'll be completely opportunistic, but if we see something given the balance sheet in the fortress level that we have we are prepared to react opportunities.
And by the way is here, we mentioned, we're buying in a little stock.
Hey, if the inbound calls.
Didn't call you, but went to an auction process do you have a sense for what the difference of price will be.
Yeah.
A lot.
Okay.
Alright, thanks, guys.
Thank you.
The next question will come from Jeff Schmidt of William Blair.
Hi, good morning, everyone.
Looking at growth during the in the USA segment, obviously continues to to be really good.
Can you maybe discuss what kind of growth you're seeing in CNS lines in particular, maybe maybe touch on what you're seeing in the market. There just given the pullback from from some big competitors.
Sure.
I mean that that is where the strongest growth is in our DNS or wholesale.
Side of the business.
Without a doubt there there is business that is experiencing dislocation.
That is finding its way into the ines or wholesale market and and so that it that is a big big driver of our growth right now.
We're seeing it in executive risk, we're seeing it and professional liability, we're obviously seeing it in commercial property.
So it's it's not every line and I think other people have spoken about this.
Not every line is going up by the same amount and some are trailing still and we are growth. So we are growing less in those areas and we're growing more in the areas, where we feel like the prices are moving appropriately one of the things. We look hard at is we tree Argentina's again talking about capital allocation like Tom just men.
Engine.
We go pretty granular forms of allocating capital when we look at our product lines in terms of we make it simple green yellow red Green as business. It's profitable we want to write more yellow is right around the target we'd like to write more of that but we need the right price in red is probably not achieve.
Leaving pricing targets and so we need quite a bit of price and it's not going to be our first priority. Most of our growth is coming in our green line. So we're we're we're focusing our growth and we're focusing our capital on our most profitable lines and.
We'd like what we're seeing in terms of the environment.
Okay.
And.
Just on social inflation and I know you you touched on this and have in the past.
Just looking at your underlying loss trends in the USA segment from they appear to be.
Quite a bit better than competitors I mean, much more stable.
Are you just not seeing it as much I mean are you surprised with what's on the commentary or hearing coming maybe is it up is it the business mix issue.
It is definitely a business mix issue there is definitely social inflation out there and like I said it goes in ways. You know, we had that big spat of tort reform years ago, and what's been happening since tort reform has been slowly, but surely chipped away at and you've got.
The other factors such as millennials and jury pools or is there is a lots of things going on but social inflation runs in cycles.
And not all lines are affected equally commercial auto has seen it probably the most.
And larger accounts the headline verdicts.
The big Fortune thousand sort of stuff that has probably been hit harder while we right.
The fortune thousand that it's a relatively small part of what we do we don't do much commercial auto we tend to be more of a small to middle size accounts sort of company and I don't think those lines are seeing is much of the social inflation is some of the other areas. So.
And also I'll say, where we were pretty proactive in managing that.
We have we watch we don't we don't wait until its.
In this is not this is not easy I mean, it's sometimes it can sneak up on you, but we don't wait until it's already on top of US we've been adjusting our books to soar to guard against social inflation as we've been moving along so.
We're definitely seeing what other people are seeing.
We're trying to manage it and our mix as protected us to some extent.
Okay.
And just one last one on on the unrealized gains just looking at it for fixed income securities.
95 million on a pre tax basis in the quarter, which is it looks like less than half.
What I was in Q1 in Q2, but looking at interest rates they see the actually.
It looks like to move down more in the third quarter than the than the first two is there is there anything in there what you know why that may be lower I mean, obviously, it's a tough.
Number to predict but.
It's straight math and the portfolio continues to come in in terms of duration, a little bit so as the as the duration number gets lower lower any given level of change in interest rates will have a smaller dollar effect on things so.
Yes.
The way in which the fixed income portfolio is invested in terms of absolute highest credit quality stuff. We can find is unchanged the only difference between now and.
Six months or a year ago. So the duration is a bit shorter than what it was a jackets januvia. There's there's one other thing depending on how you're looking at this if you. If you look at it on an after tax from a change on an AOCI I'd basis, there's a little esoteric sort of us GAAP feature that exists within life insurance and I could point you to that footnote.
In our financials, but we havent concept called Shadow loss, which essentially is a market yield goes down our investments that exist against our life insurance policy reserves.
We essentially have to recognize through the balance sheet an increase in the in the policy reserves for life insurance and a reduction in AOCI I'd say the ideal almost being if you were to crystallize the unrealized gains as a result in the decline and and put that money back to work and lower yield they wouldnt all the sudden maybe not be suffer.
I want to match off against your reserves, a sort of funny feature within us GAAP, but that is creating a little bit of that noise potentially in your calculation.
Okay I'll take a look at that thank you.
Yes, but not yet.
The next question will come from Mark to all with RBC capital markets.
Yes, good morning, everyone.
A lot of Crown has already been covered but I have a couple I'll I want to head on.
First for Ritchie.
Could you talk a little bit about the new large pine business, maybe a little compare and contrast on how thats, the same and different from nephila and or the former Catco.
Sure happy to Mark.
Large pipeline is.
What it really is a retro reinsurance.
Fun.
And it's run by people, who have run our retro portfolio at Markel.
Mark our reinsurance for the last many many years.
Wouldnt does is it really kind of.
Filled out our iOS offering the filho focuses on insurance and reinsurance.
Cat bonds things of that sort and they really do not.
They do not.
Play in the retro space, so having large PON it puts us into the and this is traditional retro this isn't pillared.
Like the Catco product was this is sort of year traditional retro one limit with a reinstatement.
And so it gives us kind of product breadth across and also this is business that we've written for many years and kept it on the markel balance sheet.
There's the opportunity there to put some of that into the fund.
Obviously continue to take a large participation in it but.
If investors find that return attractive reduce some of the volatility on Mark hills balance sheet be able to continue to grow in retro and provide exposure and hopefully to that risk and hopefully with good returns to investors. So thats sort of in a nutshell the plan.
And.
Certainly seems pretty timely considering what appears to be going on in the retro market at this point in time with all the trapped capital and whatnot.
So thank you thank you for that.
Is there anything to update at all with respect to Catco any further award from regulatory authorities or others as to when or if for how they might conclude their their work.
Really no word.
The investigations continue and we continue to cooperate and.
Really there's nothing else to report at this point.
Okay.
I think thats all for for use Richie I'd like to turn over to Tom then on the investment portfolio, given what we've seen with yields and how those have moved across the market is there anything that you're doing or contemplating doing with respect to how your positioning the portfolio I know you had recently led.
Within some of your durations a little bit.
Is that something that you're revisiting.
No the expectation frankly would be to continue to have the duration has come down sometimes their cash flows that come in and you'd.
You'd be invest some of that and we want to keep the duration still in the neighborhood of what the duration of the liabilities are so if we do absolutely nothing.
The duration probably comes a little too far too fast. So we do use some of the money to keep the duration within that four to five year bandwidth that is that matches. The four to five year bandwidth of the reliability and we're closer to four than we artifacts and thats what in this environment you should expect continued to be the case.
Okay.
And then the last question I had free Tom just and this is this is more of a I guess a macro set a comments remain.
Within the Markel ventures vehicles, you have a pretty good cross section of.
The us economy between industrial companies retail companies consumer companies et cetera.
Is there anything you're reading across with their results that might inform.
How the broader economy is behaving and whether we're accelerating or slowing or getting worse or better or anything of that nature. Just any observations I'd welcome your thoughts well sure I would encourage you to to get out move around America little bit as opposed to just reading the New York Times.
Things better than what our reported in the headlines I mean these businesses are doing great.
Good order books, and plenty to do and relieved that number one consistent comment that Ceos run. These businesses would say is.
Labour and it can be people to no took to run the businesses. So that continues to be the case. There are some of the cyclical businesses, where you're getting a bit of a width of a little bit of economic.
Slowness, but if it continued to operate under the plane in level, where we are now you and I would both be delighted but.
The ability to operate reasonably well.
Is out there and thats what businesses are doing.
It it's better than with the headline story.
Well, thanks for the comments I'll stick there in the times dispatch them.
Hi, I'm rooting for the Pittsburgh Steelers, Yeah, it's better than that.
[laughter]. Thanks, guys. Thank you bugs.
The next question will come from Charles Gold of Scotland Stringfellow.
Thank you.
Two questions.
And the feeling on the effect of the California fires at this point and I am I correct. The currency was about a $54 million drag in the quarter.
I'll take the fires Charles it is way too early.
I have any in a sense of the fires.
And.
Unfortunately, given conditions out there.
Ones that are burning could be burning for awhile and there are some possibility of more starting it's still there so.
Very much in evolving situation. The one thing I can tell you is.
We adapt and so post the 2017 fires, we made changes to our underwriting approach to reduce our exposure for 18 post the 18 buyers we made adjustments to reduce our exposures again, so all things being equal, which unfortunately, they never are.
My expectation is our exposure today is less than that wasn't 18, and more and even more or less than it was in 17. So.
We're just going to have to see in our thoughts are with those folks.
Hey, Charles Tom and owned by Jeremy to chime in on this response to on that on the FX, Yes that number is what is there on the.
The statements of no. Charles this is Jerry it's actually a gain in that period in FX through the income statement and just just to finish it off and then ill hand back over to Tom but some of that this geography. So so really we try to match off assets and liabilities in currency and we don't see a lot of movement, but the reality.
Is on the asset side that Mark kind of goes to unrealized is captured through one aspect in the in the financials on the on the liability side. It gets captured in the income statement. So you think in the in the third quarter dollars dollar strengthened against kind of Sterling and euro.
That had the impact to creating kind of losses in the on the investment and gains on the liabilities. That's what's in the income sprite and the economically subsequent I wanted to add to the technical.
Entertainment geography that Jeremy just mentioned is that while we do match everything to the best of our abilities part of that match and why we're always sort of long externally is because we have operations that are based out of London, and sternly based payroll and rent cost and things like that so generally speaking you can expect that we would be a little heavy in sterling relative.
To the pure investment match that we would have against insurance liabilities.
Thank you.
The next question is a follow up from sales Stefano of Deutsche Bank.
Yeah. Thanks, hopefully just a quick one on catco.
Just the creation and seeding of of charge re in any way to accelerate the run off for the management fees that we would see come come through the Catco business.
What it really does is assistant an orderly.
Runoff of the.
The acquit low fund, which was supportive catco and that's really the biggest thing we were trying to achieve there's just.
Make sure we do our absolute best to achieve an orderly and efficient run off for the investors.
So in terms of management fees really has no no impact on the tech of management fees.
Great. Thank you.
And this concludes our question and answer session I would now I turn the conference back over to Tom Gayner for any closing remarks.
Thank you so much for joining us we look forward to catching up with you after the new year take care.
Thank you. The conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines have a great day.
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