Q4 2019 Earnings Call

Ten years ago the recurring interest in dividend portion of our investment returns were about two hundred and fifty million in 2019. The recurring interest in dividends were roughly 450 May Markel Ventures produced revenues of eighty six million dollars in 2009 and a 2019. The revenues were over $2 billion. Jeremy will update the snatch results from last year and Richie will brief you on our insurance related operations. Then I will Circle back and update you on our investments and then our Markel Ventures operations during the comments will sprinkle in some 10-year comparisons to commemorate the decade. We hope the comparisons will highlight the profound changes at Markel over the last decade and that they will give you a share of confidence about our abilities to achieve our hopes and dreams for the next ten years with that. I'd like to turn over the call to Germany to review overall financial performance.

Thank you, Tom.

Good morning, everyone.

As you heard from Tom Markel delivered record-setting performance in 2019 with all three of our operating engines making meaningful contributions to our results first written premiums in our long-running operations. Well surpassed six billion dollars, we produce the Consolidated combined ratio 9415 are Markel Ventures operations revenues increased 7% year-over-year. We produce $264 million dollars in ebitda. Also within our Markel Ventures operation. We continue to expand through the fourth quarter acquisition a VSC Fire & Security office to finally gains our Investment Portfolio were approximately two billion dollars driving record comprehensive income and book value per share.

Looking at our underwriting results gross written premiums were six point four billion dollars for the year compared to five point eight billion dollars in 2018 an increase of 11% which was attributed 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 the net retention within the insurance segment resulting from recent changes in our outwards reinsurance tree structures.

Turn premiums in.

Three seven percent the 5 billion dollars in 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 2019 was a 94 compared to a 98 last year. The decrease in the Consolidated combined ratio was driven by lower underwriting losses arising from catastrophes in 2019 or 2019 combined ratio included a hundred million dollars or two points of underwriting losses from Hurricane Dorian and typhoons facts. Hi and how to get it compared to our 2018 combined ratio, which included $287 million dollars or six points of underwriting losses from Hurricane Florence and Michael. I couldn't Chevy and the wildfires in, California.

Now I'll cover the results of the market segment revenues from Markel Ventures increased to two point 1 billion dollars in 2019 compared to one point nine billion dollars last year. The increased revenues reflect higher revenues across our products business has driven in part by our fourth quarter 2000 acquisition of Brahman leatherworks.

For Markel Ventures was $264 in 2019 compared to $170 last year are strong. Ibadan 2019 reflects improved operating results with our consumer and Building Products businesses.

turning to our investment results that investment gains included in net income or 1.6 billion dollars for 2019 compared to net invested losses a $438 last year substantial all of our net investment gains in 2019 were attributable to an increase in the fair value of our Equity portfolio during the.

That one realizes that's been gains increased 298 million dollars in taxes during 2019 reflecting an increase in the fair value of our fixed maturity of portfolio resulting from decline that straight over the year 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 2019 was 21% The effective tax rate for 2018 is that meaningful due to a small pre-tax loss for the year on a one-time deferred tax charge that we've discussed previously.

Income to shareholders of one point eight billion dollars for 2019 compared to a net loss to shareholders of $128 a year ago and comprehensive income to shareholders for the year off two point 1 billion dollars compared to a comprehensive lost $376 in 2018 in keeping with the theme of looking back to the end of the last decade and 2009 may also have excellent investment results comprehensive income was $591 versus the two point 1 billion dollars today.

Finally, I make a few comments on cash flows capital and our balance sheet.

Net cash provided by operating activities was one point three billion dollars for 2019 compared to $893 for 2018 operating cash flows for 2019 reflected higher in collections as we continue to see nice growth in our insurance segment.

Invested assets at the holding company were four billion dollars at December 31st, 2019 compared to two point six billion dollars at December 31st, 2018 the increase in the holding company invested assets to impart to financing activity this year including the issuance of one point four billion dollars an unsecured senior notes in May and September. We use a portion of these proceeds to repay 235 million dollars a month secured seen your notes and matured in September. We also purchase and redeem the outstanding principal on our 2020 and 2021 on security in your notes, which total of 600 million the net effect is various financing activities position the company to maintain its debt to Total Capital position in the mid-20s while meaningfully extending the duration of our debt maturities historically low interest rates.

total shareholders

Reset it eleven point 1 billion dollars at the end of 2019 an increase of 22% from 2018. It's also a roughly 300% increase compared to the two point eight thousand dollars to shareholders Equity report it at the end of the last decade our Consolidated balance sheet at December 31st, 2019 included $37 billion dollars of total app set up from ten point two billion dollars at the end of 2009 and over that. We have acquired or established approximately twenty-five businesses We Stand today as a larger more diverse more resilient organization.

Over the five-year period during December Thirty ended December 31st, 2019 compound annual growth rate and book value per share was 8% and our share price was 11% We repurchased thousand and five thousand shares in 2019 pursuant to our share repurchase programs with that. I'll turn it over to risky to talk more about our underwriting programs services and ILS results.

Thanks, Jeremy and good morning. Everyone today. I'll Focus my comments on our insurance operations which include our underwriting operations State national program Services operations team and insurance-linked securities operations.

but first

Says we start the new decade. I'd like to quickly review our insurance operations accomplishments over this last ten years. We began the last decade as a global specialty insurer underwriting 1.9 a kind of gross written premiums in 2019. We ended the decade as a global specialty insurer and reinsurer underwriting 6.4 billion of gross written premiums may also added program services and ILS capabilities during the decade program Services added gross written premiums of 2.3 billion in revenues of $109 million in 2019, and our insurance-linked Securities operations added revenues of $226 million in 2019, while the numbers are interesting. They really only tell a small part of the story The more important aspect of what has been accomplished over the last decade is the significant increase in our capabilities.

Customers needs and expectations a rapidly changing.

Competition gets tougher each day, including new sources of capital entering our industry. We worked hard to add risk transfer capabilities to our tool box to best serve customers needs and compete the changing Market most importantly, we adjusted our mindset to realize that our job was to provide effective and efficient efficient solutions to connect risk to the right Capital knowing that sometimes it would be Mark Ellis capital and other times it would best be served by Third parties.

Bringing the focus back to 2019 headlines for the year include record growth written premium volume in solid underwriting results within our underwriting segment results come by a combination of organic growth and improving price momentum and more moderate cat losses. We continue to increase synergies with and Report solid red within our program services in ILS businesses.

Cuz I'll start out with the insurance segment first written premiums for the year or up 571 million or 12% premium growth for the year was driven by continued strong organic growth across several product lines, most notably our general liability professional liability and personal lines products. The combined ratio for 2019 was 93 versus a 94 last year. The one point decrease was driven by lower cat losses this year largely offset by a less favorable prior-year loss ratio error on premium volume for the year had a favorable impact on our expense ratio and an unfavorable impact on the prior Year's loss ratio. We expense we experienced higher variable expenses due in part to lower seating commissions rising from changes in our outwards reinsurance structures.

Turning next to the reinsurance segment gross written premiums for the year up sixty-three million or 6% premium growth for the year was driven by our general liability workers compensation and professional liability lines partially offset by re underwriting within our property product lines as mentioned previously significant volatility and gross premium volume can be expected in our reinsurance segments do to individually significant deals and timing the renewals the full year combined ratio for the reassurance segment was 104% versus 113 in 2018. The nine point decrease was driven by lower current accident year loss ratio and more favorable development on prior accident your losses.

the decrease in the

For your loss ratio was due to lower catastrophe losses partially offset by higher attritional losses in a property line arriving of arising from changes in our outward project reinsurance structures the increase in favorable development for the year was primarily driven by the property and general liability product lines, including favorable development in property or prime or catastrophe losses in 2019 compared to adverse development on prior catastrophe losses in 2018. We're well aware that 2019 represents the Third consecutive year of underwriting losses in our reinsurance segment primarily as a result of significant catastrophe activity over the three years.

While we are disappointed in this losing streak, we also recognize that reinsurance is a volatile business and volatility is what we are being paid to assume as a reinsurer. We don't expect to be able to fully price for the volatility. We could experience in any single year, but we must be able to price our product to make an underwriting profit over the long-term throughout the last three years. I reinsurance team has been diligently making adjustments to respond to the increased catastrophe activity and Casualty Trends to achieve underwriting profitability, We are confident that reinsurance can be a profitable business for Markel despite its inherent volatility.

next I'll touch on our program services and

IOS operations amount for our program services and iOS operations are reported with its services and other revenues expenses within our operating results.

Gross premium volume for a State national program Services operation are up 13% to 2.3 billion for the year driven by organic growth across several existing programs as a reminder almost all of this grocery premium is seated to third parties seating fee revenues were up 14% for the year due to continued growth and program Premier volumes over multiple quarters operating expenses for the year decreased due to higher acquisition-related expenses last year next. I'll discuss insurance-linked Securities operations with the full year of the fill under our belt. We have significantly grown Markel iOS platform are combined ILS operations have approximately 13.2 billion of net assets under management as of December 31st, 2019.

starting with r

And 2015 State national and 2017 the Phila in 2018 and the launch of limes large pine in 2020. We have been working hard build their capabilities and insurance-linked securities and program Services. We see significant synergies possible between our underwriting ILS and program Services businesses off total revenues virales operations were two hundred twenty six million for 2019 versus $92 million in the prior year the increase in revenues for the years due to having a full year of operations in 2019 partially offset by lower revenues from Markel katco do lower assets under management in the reduction in management fees charged on Thursday Pockets chairs.

In terms of results a number of items continue to create a complicated picture of iOS results in 2019 related to nephila while the overall operations are off the impact of purchase accounting adjustments on operating expenses and delayed fee recognition on side pockets negatively impacted reported performance sifting through the name is caused by these items and if those results for the year were largely in line with with our expectations, and we're very excited for the future.

related to

Run off of a business along with the cost of the internal review and litigation and resulted in a net loss for the year. We continue to remain focused on returning Capital to invest as quickly and as efficiently as possible.

I'd like to spend a couple of minutes updating you on the momentum. We've seen around their efforts to leverage the combined and expanded capabilities of our insurance operations. We recently successfully completed a first-of-its-kind catastrophe note issuance to protect against remote real risks are Stratosphere Stratosphere re Katniss transaction page, which received an investment-grade rating. That's a rarity for cat bonds involved Markel Bermuda State national and nephila. This test case deal transferred a hundred million a remote tail risk from State Nationals balance sheet to the capital markets with institutional investors seeking new uncorrelated returns.

We think this is a lot.

Zip code development and improve the investment portfolios for the buyers of these Securities while protecting the Markel balance sheet. It aligns perfectly with our goal of creating Solutions wage effectively and efficiently connect the right risk with the right capital.

The second example involved in the Phila collaborating to help nephila execute on its strategic goal deploy Capital into the primary Insurance markets at low cost to increase returns for investors naphil accomplish this recently leveraging markelz infrastructure and capabilities by allocating Capital to support Mark else growth in the primary Insurance off. The Philips investors are rewarded in the form of reduced underwriting expenses made possible by Markel Insurance economies of scale with quick and broader access to them approving property insurance Market Marcos Insurance operation benefits, by being a more strategically important trading partner to our broker while managing volatility on a balance sheet.

I'm excited to report that there are additional initiatives already.

Underway, and in the pipeline, which we look forward to updating you on during future calls.

Ask for market conditions the themes I've been mentioning throughout the year continued in the fourth quarter and during the important January one renewal market conditions continue to improve an incremental fashion. We continue to see month-over-month pricing Improvement in almost all lines. It's clear that the market continues to transition with Kerry as reassessing their expectations for Cat5e in severity and professional and Casualty claims trans creating uncertainty January one renewal continued the trend of gradual price Improvement. As I noted by others. There was some disappointment around property re insurance rate increases at this renewal our sense. Is that the Japanese renewals at April one and the Florida renewals, it's June one will tell us much more about the help of price momentum in the reinsurance market.

We are optimistic that this incremental.

Rating environment Improvement will continue during 2020.

So to sum it up 2019 was a very good year for our underwriting iOS and program Services operations. Thanks to the hard work and commitment of our employees around the globe and she solid profitability improved pricing inorganic growth which gives us a tremendous amount of momentum as we enter 2020 in the new decade. We remain focused on finding ways to leverage markelz unique capabilities for our customers. Thanks for your time today. And now I'd like to turn it over to Tom. Thank you Richie in our investigation. We enjoyed our best-ever investment results in 2019 in dollar terms, and it was our best total investment return in percentage terms in twenty-four years.

Interact with a portfolio. We learned a total return of 30% in our fixed-income operations. We under total return of six and half percent for the portfolio in aggregate. We are in 14.6% I'm very pleased with those results more importantly over longer time frames. We've earned excellent returns by allocating a meaningful portion of our Investment Portfolio to equities and we've learned very good results on an absolute and relative basis from doing so

every

We update a rolling schedule of investment returns that starts in 1989 over that 30 year plus time frame. We've earned Equity returns of twelve and half percent per year off and fixed income returns of 6% per year more importantly. I believe we've learned these returns while following a disciplined and safety first mindset Palm Beach and every investment decision and Markel. We believe in the balance sheet first conservatism matters most for us and we will not take excessive risks is Chase Bank short-term performance given our practices. I'm especially pleased to the 2019 investment returns. We made 30% on our Equity Investments without changing our dispatch or approach frankly. I'm surprised that we kept up with the rip-roaring full Market of 2019 as well as we did.

We continue to methodically.

And regularly add to our publicly traded Equity portfolio through the year. I expect us to continue to do so in 2020 that said we're now the point where our insurance operations during rapid and profitable growth as such I would expect that. We will actually increase allocations to our fixed-income portfolio that given our long-standing practice of making sure that our insurance liabilities are more than matched by high-quality fixed-income assets with roughly matched duration and currency characteristics.

With the theme of what we would have told you ten years ago about Investors. I went back and looked at what I said in this exact call ten years ago. Here are my exact words from a call interact with a portfolio. We are 24.9% last year modestly less than the S&P 500 return of 26 and half percent personally. I am pleased with these with this results posted an absolute and relative sense in 2009. The market rally was led by companies that rebounded from near death experiences companies with highly leveraged balance sheets and Shake Your Life circumstances often times what many fold and those sorts of firms posted sizzling one year results by contrast. We own a portfolio consisting largely of steady, Eddie Bauer chip durable low leverage and high quality businesses for us to have nearly match the S&P return with our higher quality portfolio is a wonderful outcome.

We ordered an excellent return well.

Thank you a lot less risk that approach has and should continue to pay off over time by avoiding wipeouts from which it is nearly impossible to recover. Well, that's my story and I'm sticking to it a good friend of mine named Lee Mark Hughes from Lafayette Investments once told me that my conference calls comments are Ford, but I can't tell you how thrilled I am that that's the case and my boss just wish is the ability to be just as boring ten years from now.

And our marketing Ventures engine in 2019. We reported total revenues of just over 2 billion compared to one point nine billion last year sneaking in the 10-year number since it'll probably should be this dramatic again at 2 billion dollar Revenue number compares to $86 million in 2009.

Eva. Total 264 million compared to a hundred and seventy million a year ago and I'm very pleased with the maturity and run rate of our specialized and diverse collection of businesses that comprise Markel Ventures Markel Ventures continues to provide us with cash flows that are separate and distinct from our insurance and investment operations as such they contribute to the wrong thing and durability of Markel during the fourth quarter. We welcomed VSC the fire and safety business led by Mike Meehan into the Markel Ventures family VSC operates a wonderful business that provides necessary and often legally required fire and Safety products and services. They've produced Decades of success and we're glad that they're now part of the family there would not be included in our 2020 financial reporting.

our order books and

Business outlook for the Markel Ventures companies remains encouraging we have a variety of economically sensitive and recession-resistant businesses.

The growth of Markel Ventures over the last decade from 86 million to over two billion in revenues with double-digit ebitda profitability and free cash flow generation along the way is exciting and encouraging. We remain somewhat cautious on our ability to add new firms to Markel given Current financial market conditions, but our phone continues to ring additionally our club themselves, enjoy organic acquisition organic growth and acquisition opportunities. I expect to be able to tell you about a lot of these in the twenty Thirty call ten years from now. Thank you again for your ongoing support and commitment to Markel. We're delighted and grateful for the opportunity to work with people. We love to serve our customers our communities and our colleagues, and we look forward to continuing to do so at this point like to open the floor for questions. Thank you.

We will now begin the question.

And answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster.

The first question will come from Phil Stefano of Deutsche Bank.

Yeah, thanks a good morning. We're not to talk about the iOS business is a little bit and it was it was hoping you could just give us a a status update on the the various catco investigations and and any thoughts you can provide around-the-clock the extent to which the the the pace at which the there could be returned to investors.

Well in terms of catco and the investigations there's really no material development since last quarter.