Q1 2020 Earnings Call

[music].

Good morning, and welcome to Markel Corporation first quarter 2020 top golf.

All participants will be in listen only mode.

Did you needed them, please take telecom actually [laughter], Jackie well advised me right.

After todays presentation, there will be an opportunity to ask question.

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Withdraw your question. Please press Star then too.

During the call today, you may make forward looking statement within the meaning of the private Securities Litigation Reform Act of 1995.

They are based on current assumptions and opinion.

Concerning a variety of known and unknown risks.

Actual results may differ materially from those contained in or suggested by such forward looking statement.

Additional information about factors that could cause actual results to differ materially from those projected in the forward looking statement.

Is included under the caption risk factors and Safe Harbor, and cautionary statement and our most recent annual report on form 10-K.

Quarterly report on form 10-Q.

We may also discuss certain non-GAAP financial measures in the call today.

You can find than most.

Actually comparable GAAP measures.

And reconciliation to GAAP for these measures and or.

Most recent form 10-Q, which can be found on our website at www Dot Markel dotcom and the Investor Relations section.

Please note this event is being recorded.

I'd now like to turn the conference over to Tom Gayner Co Chief Executive Officer. Please go ahead.

Good morning. Thank you welcome to the more Corporation first quarter Conference call. My name is Tom Gayner, I'm joined today, but my co CEO, Richie Whitt and our CFO Jeremy noble.

Well the nature of this call was financial.

Went to start by taking the people on the front lines I want to thank the people who are manning, our hospitals, our grocery stores or utilities and countless other essential elements of our lives I want to thank those who may not be in the headlines, but it keeps supply chains work.

In many cases the people of Markel provide any of the essential products and services I speak up and I want to take this opportunity thank them for doing so.

At the beginning of the year, we started with excellent operational momentum in our diversified insurance investment and ventures operations, we entered the year with a conservative balance sheet.

Hi quality fixed income holdings, no near term debt maturities and a publicly traded equity portfolio stood at 69% of shareholders equity.

Those equity Securities had a cost basis of 3.3 billion in a market capitalization of 7.6 billion at that time.

In mid March conditions changed suddenly and dramatically cobot 19, driven shutdowns of the economy started to take place since that time covert 19 has come to dominate just about every aspect of life and Mark Calix No exception.

Our focus has been and we'll continue to be on building markel over the long term that said current conditions must be addressed.

We're making daily and continuous decisions as we navigate through this historic time, and we'll do our best to keep you informed of our progress as we do so.

During today's call Jeremy will update you on our numbers Richard will discuss conditions in our insurance operations and I will return with comments about our investments and ventures operations. Following our brief comments, we will attempt to answer your questions with that Jeremy.

Thank you Tom and good morning, everyone.

I'd be remiss, if I didn't take a moment an echo Tom sentiments of thanks, and depreciation first the medical professionals frontline workers in public servants for courageously entirely taking care of our communities I'm equally grateful to our employees around the globe I've been impressed at how they are taking care of their families customers distribution partners and each other during these unprecedented.

And so again thank you.

As you heard from Tom It's on our earnings announcement, our consolidated quarterly performance was heavily influenced by cobot, 19th and the adverse impact it had on both the asset and liability sides of our balance sheet.

Our next which can be seen in the results of our insurance investment engines.

Looking at our underwriting results gross written premiums were $1.9 billion for the quarter compared to $1.7 billion in 2019, an increase of 13%.

This increase is almost entirely due.

Due to our insurance excitement, which reported gross written premiums of $1.4 billion, an increase of 19% compared to the 2019 period.

This growth related primarily to increased writings within our professional liability and general liability product lines gross written premiums within our reinsurance segment were consistent with the 2019 period it just over $500 million.

Retention of gross written premiums decreased to 85% from 87% in 2019, driven by lower retention within our reinsurance segment, resulting from purchases of additional outwards protection on our property product line as we seek to effectively manage capital and reduce volatility around catastrophe exposures.

Earned premiums increased 11% to $1.3 billion in 2020 due to higher written premium volume in our insurance segment.

Our consolidated combined ratio for 2020 was 118 compared to 95 in 2019.

Here's where we begin to see the effects of cobot 19 in a liability side of our balance sheet.

During the quarter, we recognize our best estimate a pre tax net losses and loss adjustment expenses were $325 million for Coven 19 East Coast 19 losses increased our consolidated combined ratio by 24 points. So if you do simple math the consult a combined ratio prior to the effects of Covre 19.

He was 94.

These reserves were establish after detailed policy level reviews as well as a review of our in force inwards and outwards reinsurance contracts and those instances, where we identified Kevin 19, as the Proximic cause of loss, we established loss reserves in the first quarter 2020.

Our losses from covered 19 are primarily attributed to the business written within our international insurance operations, and our primarily associated with coverages for event cancellation and business interruption losses in policies were no specific pandemic exclusions exist.

Through the inherent uncertainty associated with our assumptions around coated 19, which among other things include assumptions related to coverages liability reinsurance protection duration and loss mitigation factors as well as the fact that the economic impact to the pandemic continued to evolve our estimates may be subject to a lot.

Range of variability.

Excluding the effects of 19, our current accident year loss ratio was higher year over year due to slightly higher attritional loss ratios, both our insurance and reinsurance segment.

We have yet to reflect meaningful benefit from rate increases we've been achieving.

With regards to prior year loss reserve development, consisting with our loss reserving philosophy prior loss reserves developed favorably by $104 million in the current quarter compared to favorable prior year development of $70 million and the first three months of 2019.

Next I'll touch on our program services and I less operations, both of which are included in results of operations and our results of other operations.

Our gross written premium volume from our state National programs services operation was down 20% to prior year driven by the run off of one large program and the cancellation of enforce book of policies related to another large program, which resulted in the onetime unfavorable premium adjustments.

As a reminder, almost all of this gross written premiums ceded.

Feeding fee revenues were up 4% from last year due to growth in the program premium volumes during 2019.

Turning quickly to unless operation our combined dialects operations have roughly $12.5 billion of net assets under management at the end of March two 2020, Markel Catco operations are continuing to wind down as they work to return investor capital as quickly and efficiently as possible.

Revenues from our pilots operations were flat compared to prior year with increases coming from our Nephila MJ operations being offset by decreases in management fees from Markel Catco due to lower assets under management and a further reduction in management fees charged on side pocket shares.

Operating expenses for my less decreased compared to the prior year, which is primarily due to fewer professional fees associated with a review and investigation and Markel Catco.

Turning to our investment results as I've mentioned in prior calls given our long term focus variability in the timing of investment gains and losses is to be expected to that point, Here's where you see the coven 19 impact on the asset side of our balance sheet.

Net investment losses for the quarter were $1.7 billion compared to net investment gains the $612 million last year, a year over year decline of $2.3 billion essentially all of our net investment losses in 2020, which reputable for the decrease in the fair value of our equity portfolio during the period as Kevin 19.

Yes, it ended volatility in the capital markets.

We've continued to see volatility in the equity markets over the course of April but has seen some of the equity price declines to reverse.

For the gross and net investment income, we reported $88 million in the first quarter 2020, compared to $114 million a year ago and the decline was mostly due to losses recognized on equity method investments.

Net unrealized net unrealized investment gains increased $66 million net of taxes during 2019, reflecting an increase in a fair value of our fixed maturity portfolio, resulting from declines in interest rates during the first quarter.

Now I'll cover the results of Markel Ventures segment, which as a reminder has as results reported in only one month lag.

Revenues from Markel ventures increased to $511 million for 2020 compared to $455 million last year, an increase of 12%.

The increase in revenues was primarily related to the acquisition of the SEC fire and security, which closed during the fourth quarter of 2019 to a lesser extent, an overall increase in our consumer in building products businesses.

EBITDA for Markel ventures was $67 million for 2020 compared to $55 million last year, an increase of 23%, reflecting improved operating results within one of our consumer and building products businesses and greater EBITDA within our transportation related products businesses as well as the acquisition of Dfc fire and security.

Looking at our consolidated results for the year, our effective tax rate was 21% for the first three month or 2020 in 2019.

We reported a net loss to shareholders of $1.4 billion for 2020 compared to net income to shareholders, a $576 million a year ago.

Driven by the net loss comprehensive loss to shareholders for the first quarter was also $1.4 billion compared a comprehensive income the $732 million in 2019.

And finally, I'll make a few comments on cash flows capital and our balance sheet.

Net cash provided by operating activities was $66 million in 2020 compared to $19 million for 2019 operating cash flows for 2020 reflected higher premium collections as we've seen strong growth in our insurance segment over the past several quarters.

The increase also reflects the effects of lower claim settlement activity in both our insurance and reinsurance segments, partially offsetting strong cash flow activity in the first quarter was an adverse impact to cash flows for the return of collateral held for unearned premiums on large program within our program services business. It was cancelled in the period.

Invested assets at the holding company were $3.3 billion at the end of March compared to $4 billion at the end of the year.

The decrease in holding company invested assets was due to a decrease in the fair value for their equity portfolio again arising from covered 19 is impacts.

Recognizing the importance of liquidity in times of uncertainty, we've taken several actions, including rotating cash proceeds from the maturity short term investments and fixed maturities pausing our purchases of equity securities in certain instances selling equity holdings suspending repurchases of our shares and focusing on expense reductions across the company.

We continue to maintain a fixed maturity portfolio comprised of high credit quality investment grade securities with an average rating of double A., our debt to total capital ratio at the end of March was 27% in line with our target range. We have no unsecured senior notes maturing in the next 24 months. We believe we are well positioned to meet our ongoing capital and.

Liquidity needs, including the cash required to complete our pending acquisition Lansing building products.

Total shareholders equity stood at $9.7 billion at the end of March compared to $11.1 billion at December 30, Onest. So in summary.

Unprecedented events surrounding covert 19, certainly impacted our quarterly results over the actions we've taken over the years to build a diverse and resilient organization will help us navigate through the current uncertainty arising from this pandemic.

I will turn it over to Ritchie talk more about our insurance businesses.

Thanks, Jeremy and good morning to everyone.

First please let me add my thanks, as well as well the first responders and essential workers.

Since 1930, Markel Wizard reputation of being there for its clients partners and communities during good times in Bath. This crisis is no different.

As the situation has unfolded thousands of Markel associates have done an outstanding job, providing exceptional service to our customers.

Our associates continue to exhibit the markel style of flexibility spontaneity innovation in pursuit of excellence as we all navigate this incredibly unique situation.

Now I'd like to give you an update on the current impact in potential future impact of the cobot 19 crisis on our insurance reinsurance program services in iOS operations collectively these are our insurance businesses.

As long term followers of Markel, we'll know we adhere to a consistent reserving fab methodology that is laid out in our 10-K.

Inherent in our reserving practices through desire to establish loss reserves that are more likely redundant deficient.

While the year consistently implementing our processes, we analyze the coded 19 situation.

We cannot be certain that our estimates will prove to be more likely redundant bend deficient.

There are simply too many unknowns at this time, given the unprecedented and ongoing nature of the event.

Having completed our initial ground up review of each of our product lines and specific policy language. We have included managements best estimate of our ultimate direct coated 19 insurance losses in our first quarter results.

As we observe other insurance insurers reporting results. It is clear that a variety of approaches are being taken with some companies planning to more fully reflect their code with 19 exposures.

In the second quarter.

So let's kick off of talking about revenues, we started the year with substantial growth in the first two and a half months continuing the momentum we had seen for the past several quarters.

Quickly changed as much of the us in world economies rapidly close.

We have seen a drop off in new business submissions over the past six weeks within our insurance operation, leaving our written premiums during that time roughly flat to the prior year.

Over the same period of time, our renewal business is holding up very well.

This is obviously a small sample size and we do not believe the full impact of the cobot 19 situation in shutdown is fully reflected yet.

As one would expect our small business has been hardest hit by the shutdown.

We would expect premium volume to pickup as economies start to reopen but believe it would be overly optimistic to predict a near to medium term returned to the growth rates, we saw at the beginning of year.

While our program services businesses generate fee income that fee income is calculated based on premium volume written in the insurance programs we support.

We would expect to see a short to medium term dip in fee income and then recovery as the us economy reopens.

Regarding insurance pricing, while there is reduced demand in the short to medium term recent this only provide more evidence that rates need to increase to align with the exposures the industry insurers.

We are obtaining and we will continue to push for rate increases and believed that our peers will as well.

We continue to see month over month increases in rates through the end of March we don't have or April data yet.

We are seeing an increase in demand for reinsurance.

Insurers capital has been reduced as a result of the fallout from the pandemic and more importantly risk appetite has reduced reinsurance courses of form of capital in a way to de risk for primary insurance companies, we expect increased pricing and demand for the foreseeable future in reinsurance.

Our iOS operations provide a low correlation investment class to sophisticated investors.

In the short run given market disruptions, we would not expect to obtain significant new investment subscriptions.

However over the longer term, we believe current events once again validate the benefit of aisle less investments.

Also as I previously discussed we see an attractive rate environment in insurance and reinsurance, which are iOS operations can take advantage of.

Switching to losses as discussed in our 10-Q and previously on this call by Jeremy We recorded 325 millions over of reserves virtually all of it I'd be NR for direct coded 19 insured losses in the first quarter.

These reserves relate primarily to potential UK business interruption claims and worldwide event cancellation exposures.

On the workers compensation front, while we have received very few claims. So far we also expect to see an increase in claims that are directly related to coded 19.

It is worth noting that all of our us pop property policies require physical damage to occur before business interruption coverage is triggered and almost all of those policies also include a communicable disease or virus exclusion.

Oh here I'll stop and just say some of our policies have affirmative coverage often sub limited that would cover the have been some coded 19 and those are included our reserve estimates for those are rigs included in our first quarter.

Therefore, our property or us property policies are not expected to respond to cope with 19 related business interruption losses, although we will be investigating each claim on its own merits.

Our reserves were based on the ground up analysis, but we're also informed by very preliminary industry estimates that suggest overtime Cobas 19 could produce anywhere from a 50 billion to 100 billion insurance industry loss events.

We would also expect to see meaningful losses indirectly related to the cobot 19 pandemic as a result of the disruption in the global economy in financial markets.

These could include lines, such as Deno, Dino Workers' compensation trade credit surety and casualty losses, and the profitability of these types of losses impacting reinsurance business that we right.

Similar to the losses that emerged as result of the 2008 financial crisis, we would expect these losses to be indirect losses to emerge over the coming quarters.

Our underwriters actuaries and claims personnel will be working to quantify the increases to our loss ratios potentially required by these indirect losses.

Finally, we are perfect. We are prepared for elevated litigation expenses are as it relates to cope with 19, particularly as it relates to business interruption claims in both the us and abroad.

Where appropriate we are taking steps to mitigate future exposure to pandemic losses by raising prices and adding policy terms and conditions, including additional exclusions.

There could be insurance lines were underwriting loss trends decrease and partially offset the impact of coded 19 direct and indirect losses. An obvious example of this is private.

Private passenger auto where our participation is small other than through our relationship with haggerty and their classic car program.

However, it is too early to speculate which lines if any other than autoweb could have there in traditional loss ratios favorably impacted and by how much.

In addition, we've already seen regulatory pressure to provide rebates in some of these areas.

So in summer summary, while it is early and there are many unknowns, we believe the impact of Kobin 19 to our insurance businesses is meaningful but also manageable.

We have a diverse insurance business portfolio, both by geography and product line in solid liquidity and capital position.

We look forward to continuing to serve our insurance in production partners, especially as the world's economies begin to reopen now I'd like to turn it back over to Tom. Thank you Richard.

During the first quarter 2020, our overall investment portfolio declined 7%.

Our equity portfolio declined 22.4%.

This is the biggest quarterly decline since 2008 will not.

Our fixed income portfolio rose, 1.9% during the quarter as overall interest rates continued to decline.

After adjusting for foreign currency movements and investment expenses. The total return was a negative 7%.

Over the years, we've allocated a meaningful portion of our equity capital to a portfolio of equity securities.

Over 30 years that level of allocation has ranged from approximately 50% to 80%.

The level depended on our views and comparisons of investment opportunities insurance underwriting opportunities acquisitions and other business alternatives as I mentioned in my introductory comments, we started the year at 69% and ended the first quarter at 58% from a combination of modest sales as well as the overall market Dick.

Hi.

We continue to select our equity holdings by following our long standing discipline of looking for good businesses with good returns on capital and limited debt.

By management teams with equal measures of talent and integrity with capital discipline and reinvestment opportunities at fair prices that discipline does not change.

In the current environment and the circumstances, we expect for the foreseeable future. We believe that some previously good businesses may be challenged to earn reasonable returns on capital going forward.

With this thought in mind, we continue to come over each and every security we own we continue to re examine each folding in light of what does happen and more importantly changes that we would expect persist for some duration.

As we do so we've adjusted our views on the profitability and outlook for some companies enacted accordingly.

We expect that to some of those actions should serve to both improve our balance sheet and future returns.

Same discipline applies to our fixed income operations. Our focus has been and continues to be on the highest rated sectors of the fixed income market.

Our portfolio is roughly 89% in various government backed securities and 93% rated double your better.

And our ventures operations the year started well as Jeremy reported our diversified set of businesses produced revenues of 511 million compared to 455 million EBITDA of 67 million compared to 55 million a year ago. Those results are reported with one month lag and do not yet include our acquisition of why.

I think building products.

The Lansing transaction side in the early days of March was the culmination of a complicated multi month process that involve two steps we acquired laughing from certain members of the Lansing family and lastly, Lansing acquired Harvey building distribution products in conjunction with this transaction.

Lansing, It's a successful third generation company based in Richmond, We've noted admired the Lansing family and their organization for years.

A flattening in Harvey distribute building products for both new construction and repair and maintenance needs.

Hunter Lansing will retain the vast majority of his equity stake in the combined firm and will serve as the CEO the combined plants and Harvard business is going forward.

We're pleased to welcome Thunder and the Lansing organization to Markel along with the Harvey organization. There are few proven financial performance on long term values and culture are consistent with all that we seek at markel.

Clearly economic circumstances changed since we began the acquisition process that said Lansing is operated successfully during previously previous challenging economic circumstances. They enjoy a large presence in the more stable repair and remodeling segment alongside their offerings related to do construction and we believe.

They will be meaningful long term contributors to our results over time.

We're not engaged in any other discussions on ventures acquisitions at this time.

Turning to the balance of our ventures operations. The cobot 19, economic shutdown, taking place causes current conditions to be different than what was the case in the first quarter, we're responding accordingly, and working diligently to operate the businesses in light of new business realities.

We continue to operate our markel ventures businesses to meet our customers' needs for necessary and desirable products and services. The company's of Markel ventures do things is basic is making the equipment to baked bread and processed food.

The main components for trailers used by trucking companies to transport the goods needed for daily life to provide housing in shelter to protect against fire to provide health care and many other essential goods and services. We're proud of the work of all of our insurance investment and ventures companies and what they do to provide for our customers in.

Our associates.

To close the good friend of mine semi a quote yesterday from former Secretary of state Madeleine Albright and that's what was the best response to disasters resilience, we embrace that idea and believe that our diversified operations add to the resiliency of the Markel Corporation. We now look forward to answering your questions Sarah.

It would be so kind to open it up.

Okay.

We will now begin the question and answer session.

Good question you May Star then one on you touched on.

If you are using a speakerphone please pick up your handset pricing.

And with Jive Your question please pardon.

At this time, we'll pause momentarily to assemble out there.

My first question will come from Mark Hughes with Suntrust. Please go ahead.

Yes, there mark.

You on mute.

Tony.

We can hear you now.

Okay. Good I'm sorry.

In the international business interruption, how do you go to the remediation when do we get back to normal.

And what sort of limits are there on the although.

Mhm.

Okay, Mark I'll attempt that way.

Most of our policies exclude.

Business interruption as a result of communicable disease viruses and all of our policies Ricardo require.

Physical damage.

So it's sort of a belt and suspenders approach first first and foremost requires physical damage and then in a lot of cases, we have virus exclusions virus exclusions are not prevalent in the UK market and so our policies did not include those virus exclusions, we have gone.

Through our portfolio of business, there tends to be small to medium enterprise business in the UK.

And looked at the wording.

There are various wordings and again they are different from our us wording and where we believe there is affirmative coverage. We have made an estimate of the losses that could potentially be there and obviously, we're having to make a lot of assumptions in terms of what's the duration of the business shut.

Down are they completely shut down or they partially shut down. So there is there's a number of factors that we've put in there and our typical fashion.

As I said at the beginning we've tried to be more likely redundant than deficient.

But there as I said theres, a lot of assumptions and a lot of unknowns at this point.

In terms of the go forward when.

Things getting back to normal my assumption is going forward, there's probably going to be less grants.

Of coverage related to communicable disease and viruses in.

The international markets more like the us markets.

But thats you know that doesn't as we go forward.

Thank you for that and then the look like in your Reinsuring.

Exposing airport business interruption, there's the $15 million revision in the EU.

I think you said the in the U.S. there certain policies the sub limit.

You had bigger exposed on the reinsurance.

Direct so could you talk about what that is.

It get out.

It's very difficult at this point to estimate reinsurance exposures because the primary companies are still grappling with what their exposures are and obviously, we would hear from them. Once they have a handle on that but we have identified some business interruption.

Some potential business interruption that we could potentially cover on the reinsurance side, some accident and health exposures that we could potentially cover and that that's what we have.

Tried to make an estimate of on the reinsurance side.

And then the program business. The you referred to two large customers how much does that impact youre a revenue on a go forward basis.

One of them with a customer that.

Had the EMS and we knew if we have note about this for quite awhile base. They received an upgrade to their rating and no longer required state National services. So we had budgeted.

For the gradual reduction of that business over the last year and a half actually so that was that was sort of planned into it and into our budgets and everything so I would say minimal impact in terms of our first quarter results.

The other.

One was a.

A program that ended and it ended on a.

Canceled rewrite basis, which is where you return to the unearned premium and so that had a negative impact of about 55 million of premium in the quarter of the that was return and we think that will have a two to 3 million dollar impact going forward on on fee.

Income for the rest of the year.

Thank you.

Our next question will come from Stephano with Deutsche Bank. Please go ahead.

Yes.

Im medium term parsing board to finally, but it feels like there is a.

A segment of the business interruption, Queen where there was no specific pandemic exclusion.

But then a reserve was established.

And I'm just trying to understand me I.

I think the concern is the extent to which.

There is the absence of a virus, which usually the extent to which stacking train fleet to maybe I'm intended or.

On the answer is included losses, just just given the environment like can you help us think about it is best suited there's reserves in that scenario and how are you thinking about the potential for losses in that kind of situation.

Sure happy too so in the U.S., let's let's take it in the pieces, let's take it in the U.S. and primarily the UK would be the other bucket in the US we have a belt and suspenders approach, where all of our policies require physical damage, which covered 19 is not physical damage.

In addition on the great majority of those policies, we have virus or communicable disease exclusions and that is not something new by the way that those exclusions have been going on those policy since 2007, so thats over a decade that that has been in those policies.

In some cases, we granted coverage or.

There is affirmative coverage, it's usually sub limited usually about $25000. So we have we have added up those policies and made an estimate for the bosses that we could see from does there is another subset of policies, where we have affirmative coverage in the U.S. often.

In in like the hospitality industry.

And we have assess those policies and put up up and put up reserves for what we think potential losses could be there.

Switching or so so we believe we've got losses up that are appropriate for those to those two subsets.

And then on everything else, we have the belt and suspenders approach.

In the UK it.

It does require physical damage, but there has not historically been the use of.

Virus or communicable disease exclusions, we have gone through our policies reviewed the language and where we believe there is some level of affirmative coverage that has been granted of course subject policy terms and conditions. We have made estimates for what we think that business interruption loss could look like.

And we have.

Kind of looked out into the future on how long do we think these businesses could be shut down and put that into our loss reserve.

Okay. So it feels like the U.S. perspective.

There's two scenarios is the made there is an explicit <unk>.

For there is a supplement.

Yes, yes, I think that is fair that is there there are some policies, where it's not sublet amid limited, but we've also looked at those women.

And based on whatever that limit is we've estimated what the potential loss can be.

Understood, Okay, whether any notable captain in the quarter I didn't see any into Q.

Certainly there were cats, there were tornadoes hail almost all the usual things it did not rise to a level that we felt required to break it out.

Got it Okay, and I was hoping you'd commented on the ability to.

The complications when the Iowa extended the business with new investments subscriptions.

How did that steel will be the launch of logical launch point I mean is largely on track have expectations around the timing reduce the size of the business didn't change maybe you can just give us a bump on that.

Sure.

On the IR left side.

You know the exposure to actual losses from Cobot 19, we believe is fairly minimal.

But theres, obviously been significant disruption in the broader financial markets and whenever that happens.

People tend to seek liquidity and so our expectation and we're still out there talking to potential investors, but we've sort of in our own mines. This.

Our assuming that.

That process could take longer as people deal with the uncertainty in the markets right now.

So we still would hope to raise capital does that in the fella in large part, but we're trying to be realistic in terms of what the situation is and in our own minds thinking that could be a longer path to getting those additional subscriptions.

And the Fella.

We're at about 10 billion of assets under management.

Thats been pretty stable, we haven't seen a lot of redemptions and we are working to see if we can add subscriptions large pipeline you know timing for cobot 19 was not good for large time, just talking about that disruption, it's going to take longer to raise capital. There we have written.

In the port most of the portfolio for large pipeline for the year and Thats being where housed on Markel Bermuda. So.

The portfolio is written and Markel as housing that portfolio on our balance sheet and as we raised capital we can see some of that business to launch pie.

Got it Okay I got a few more but I'll requeue I just wanted to add a quick note that the level of detail that you broke out within the Qubits thoughts in the potential losses is for more than we've seen from peers, thus far and I know I truly appreciate it. Thank you so much.

And look forward to discussing in the future.

Thank you.

Our next question.

Ron Bachman with capital return. Please go ahead.

Thanks, a lot and thanks for the help given how early days we are.

I'm not trying to get arms around exposures in losses I had a question about sort of the IRS world and in particular sort of collateralized three.

And the has implications for collateralized capital.

Yeah sort of contract expiration have you gotten any any.

Indications or or.

Thoughts from the teams there as far as the prospects for capital.

In the locked up.

Given.

Our risk associated with the I.

Yes.

Ron Yes, we are thinking about this things and there is a belief that.

Cedents, we'll look to a trap more capital because of that tail risks that you discussed.

So we are planning for that potential I will say that.

There are provisions in the into contracts that.

If you want to trap that capital you have to put up a certain amount of reserves. So.

Since will be required to put those reserves up and their financial to be able to trapped capital.

And I'll ask I can't just think or want to be really careful and hope of that.

They can they can't just tie up the capital.

Without putting up a reserve so they're gonna have to feel like the exposure is known and unknown off to record it to be able to trapped capital.

But we are considering that both at the Phil and large pipeline and planning for it and honestly, yes, I think there will be trap little cap can travel capital trapped as a result of coded 19.

And Thats I think we'll continue to lead to more tightening in the reinsurance and collateralized reinsurance markets.

You may have accidentally come across a new term right there.

[laughter] hopefully it's not a.

Whatever hopefully it's not to comment that we need that were.

Another topic.

Obviously.

The world is going through a dramatic economic shutdown contraction and savvy, it's going to its going to persist for some period of time, hopefully get alleviates, but it's going to suffer if we're going to suffer.

And it in your core BNS business, obviously, all all responders or going to suffer that decline in the size of of risk units and protection purchased but on the flip side, you talked about rates going up.

Which will be different offset.

But I would imagine that the <unk> the admitted markets will.

May reduce their appetite for sort of the grey area of risks that.

That could migrate back to the N.S. market.

What do you think of sort of will the positives of rate and declining admitted underwriting appetite exceed the economic contraction or is the economic contraction to sort of two great.

And I'm talking about later this year in next year or sort of be the pluses and minuses, which one do you think sort of rules the day.

[laughter] up you know thats the the million dollar question Ron what we saw in April was a lot of the things you. Just said we are seeing E N S.

Pick up because I think there is a reduction in risk appetite out there as a result of all the disruption. So we've got certain areas of our book where rates are up substantially and our writings are up substantially.

In April that did offset the decreases we saw in small business in places that you would expect to be hit hard by Cobot 19.

I got I believe we haven't seen all of the impact from coded 19, yet.

You know insurance business comes in on a tad it was a bit of a delay. So I think we'll see more of that in the second quarter and Thats the million dollar question out how little those things offset each other.

We're trying to plan for.

That in our businesses and we're keeping an extremely close eye on it.

But you're absolutely right theres going to be positive such as rate increase in decrease and risk appetite, but how will that float against just back that left businesses seeking coverage on the primary side.

On the reinsurance side.

It's a hard market.

Appetite is down demand is up.

And you're going to see more people looking for coverage and pricing going up accordingly.

All right. Thanks for the help gentlemen.

Our next question comes from Jeff Smith with William Blair. Please go ahead.

Hi, good morning.

The coping 19 loss is 325 million just trying to.

Make sure I understand that and it sounds like there really haven't mini claim so it's mainly IP in our.

But are those your estimates of business interruption Vin cancellation for the year.

Or should we be expecting this type of.

Level of losses for the next couple of quarters.

That is our best estimate of business interruption losses and event cancellation losses through the remainder of the year.

Obviously, a lot of assumptions baked into that but that is our best estimate.

In terms of for example, with Ed cancellation Arab bid cancellation booked goes from wedding cancellation to the Olympics and when Bolton. So it is it runs the gamut and we have tried to look out for the rest of the year in terms, what we think the potential exposure could be we've tried to book.

Fast in the first quarter.

The thing that is not represented here in this number is.

The secondary losses or the indirect losses in that things like the potential for do you know around bankruptcies or you know for brokers.

You know that we're going to be dealing with just like after 2008 over the next several quarters.

Okay, Yeah, and I guess theoretically that could be.

Fairly large I mean, the workers comp piece that doesn't seem like the other component outside of been cancellation business interruption was small.

What's your expectation there just on the on the workers comp means.

Our workers comp book is not a weighted towards first responders.

That's an actually a very small part of our book, but obviously, we would expect claims there when you get into essential workers you know maybe like.

Restaurants.

Retail.

You know depending on.

How how the rules work there we were product we've got a little more in that bucket.

So we would expect to see claims.

In addition in workers' comp you're going to see claims because of the change in the economy workers comp claims go up wind on.

Unemployment goes up so we are we're going to be trying to factor that into our picks as we go forward.

Okay.

And then you touched on Markel ventures, but I guess, obviously quite a few.

Manufacturing businesses in there I mean, what.

Type of impact are you seeing now over the last few quarters, just on the top and bottom line I mean could there be contraction in revenue growth there potentially.

Yeah, I don't think anything that we would report over the next quarter to would surprise you given the nature of the economic shut that went in the economy shutdown it shut that but that being said all of our businesses are operating all of them are filling orders and and I.

Our operating business within the constraints that they have actually following public health protocols and.

Compliant with every.

Letter in spirit of the law plus the spirit of Markel take care of our employees, but clearly economic activity is diminished at the moment and our our businesses will reflect that.

Okay. Thank you.

Our next question comes from John.

Furthermore, please go ahead.

Hi, Good morning, everyone I guess I don't know question.

Hey, Ritchie.

I just want to I thought I thought your opening comments were very good and complete.

And it's an uncertain situation you gave us a lot information so I appreciate that.

My question is Richie I wasn't totally clear.

You talked about the losses, which are basically all idea and all right now.

You mentioned business interruption event.

Our the workers expected workers top losses in that.

Every 25 number or is that in addition.

There I don't think there's very little with any workers comp in that number right now John.

I don't know that we had any claims in yeah. As we were establishing the number but we would expect claims as we go forward in workers' comp and the so thats. Yeah. This is a very strange event and it you know when I don't have to say that everybody knows that but this is an ongoing.

Event, usually you have no gain or something and it's over and you start adding up your exposure, but this win is ongoing.

So you know there are people, who will get sick, we have not gotten sick, yet who will claim for workers comp.

And those losses will come in at that point.

Okay. So I just wanted to be clear, whether there was any DNR.

Can you talk about on the fixed income side.

Your largest allocation is muni bond.

There's a lot more press about mail out smell bail out all the.

States that we live in are under stress.

Financially with the virus. So can you talk about how you're assessing the risk your muni portfolio.

Sure.

Well, we're actually following the same sort of underwriting we always have Moody's to review the bidding our about 40% of the fixed income portfolio now we've always operated with a position limits. So we.

Any given state can be no more than a certain percentage of the portfolio and even within those are those purchased and portfolio limits.

We don't just by a state bond that would be a spread of localities and jurisdictions within that state.

Then the next flight layer of underwriting is typically we buy a geo and essential services like water and sewer Oh, we don't feel like stadium stadium financing or any of that kind of stuff. So there's an epic spread that we've always kept to be in mind.

With the whole portfolio. So what were the tippy top of everything we know how to do to be as pristine and credit quality as possible now. The reports that you are speaking up in terms of general municipal finance conditions. I've described this is being systemic so it's not you'd like to Hell and if you look at the a lot presence of municipal.

Finance within the entire structure, it's one of those things like Steins law things that must be will and things that can't be want.

It is it is.

Definition will to me that the structure of municipal finance has to work.

In order for the modern financial system to work. So as you see the central bankers in the political leaders used the phrase whatever it takes that is what is happening and I believe that will continue to happen because it has to it.

And we're not gonna secondly, we're not going to speculate and be at the lower ended the curve or try to be two cuter too close to the line of what what central banks will buy or wont buy will be well be at the very tippy top of the spectrum.

Okay, and then let let me ask.

Question that.

Further out and it's probably too optimistic for a moment, but.

I would think with.

60 basis point or whatever it is 10 year treasury bond and the volatility of stock.

I know last would be a phenomenal.

Estimate for the pension funds, which need to and 7% a year.

And not correlated to the stock market so I.

And then as this potentially down the road.

Real opportunity for iOS, so is that too optimistic of a view given the environment.

John that that's our that's our view exactly we recognize in the short to medium term. It you know everything about the situation is negative [laughter] like so many level, but right. This this just again proves why the iOS investment is valuable it does.

It has very very low correlation to the rest of the market.

Okay. Thank you.

Our next question comes from Mark well with RBC. Please go ahead.

Yeah. Good morning, I'll, let go the other comments. Thank you for the older disclosure was a very thorough in very mature.

First question I wanted to ask is.

It was coming in the opening remarks, and it's in the queue that there was a $20 million.

Large within the investment income related to equity accounted investments you provide a little bit more detail about that and what the circumstances, where the produced the charge sure Mark This is Tom.

The way that works there theres a couple of firms that we seeded over the years in terms of giving them some money to manage and normally we got some economics of the from itself overrides.

I'm doing to limited basis, but what we've done a couple of that over the years.

The way that in that particular charge and I believe that we had given that from 25 million dollar spent a number of years ago of the value of the portfolio in of itself has gone up over time, we've gotten some of the economic confirm itself, but they had a rough first quarter. So all of the fair market declined it happened.

During the first quarter shows up as that specific chart now that being said we're still.

Profitable and that overall and investment with that from its just the profits. We have earned over the course of last several years, we're never isolated and labeled individually, whereas the mark to market decline into first quarter was.

So we've made money on that investment over time, but that that's what drove that to be the case.

I see okay. That's helpful.

Within the again within the Q there was a comment about an increase in attritional losses within.

Workers comp and property in the insurance business you just to elaborate on what you're seeing there and maybe what some of the drivers are particularly on the workers comp side.

Well just one second.

Yeah.

On reinsurance.

I thought it was in the insurance segment, but maybe I, maybe my notes are confused.

Yeah, well maybe.

Maybe I'll try the little more generally because we're we're struggling to find with that reference was in the queue, but.

It's interesting Mark obviously, there's been a lot of discussion of social inflation and we certainly are seeing some signs of that in our numbers as well.

It's probably we're seeing a bit less of it on the insurance side than on the reinsurance side. It takes longer to get to reinsurance. So I think those comments would have been related to our reinsurance into D. A reinsurance business and would have been around.

Some of our workers compensation business, there and some of our casualty professional business there.

So we have seen we have seen the impact of social infat inflation on the reinsurance side.

And we're seeing it some on the insurance side, but nowhere near as much also interesting to us and again very early days.

Our claim activity is down our attritional claim activity is down in the first quarter of 2020 compared to 2019.

Only a couple of those weeks were impacted by the code at 19 situation. So we're still assessing that but but that hopefully that helps out a little bit hey markets chair amount is that it's more weighted towards property in workers' comp with regards to attritional and actually another part of that workers comp limit.

The mix in the portfolio between where we're writing quota shares our ex the lost contract they get a slightly different attritional fair. So I wouldn't read too much into that comment with regard to that moving attritional loss ratio from a reinsurance workers count standpoint.

Okay.

And then the last question that I had was you.

Rich hearing in your remarks, you alluded to.

The probability of higher litigation.

Expense you know in defending your various contracts, particularly for be I'd, probably for just about everything.

That's been reflected or that is being reflected in the loss picks that you selected in Q1 or is that something that you're still awaiting development on before before making that type of a upward adjustment.

Yeah, I would say, it's more implicit than explicit in terms of the numbers that we have put up but I mean, we very much I mean, and here's the reality I mean, the economics that are at stake you know the economic damages that had been done by the situation or just so long.

Large.

People have of incentive to attempt to recover that even if.

Their coverage was not right. So we just simply expect given the size of the economic damage. The political backdrop. The emotion involved there's going to be more litigation in so we are preparing for that.

That.

Is implicit to the numbers as we go forward and probably be more explicit to the numbers.

Huh.

Thanks for actually answers appreciate.

Yeah.

Again, if he'd like to ask a question. Please.

Then one.

Our next question is up all that well still have fallen out with Deutsche Bank. Please go ahead.

Yes. Thanks, if I was hoping you could just help us think about how the rating agencies. There are viewing the debt ratios, especially in the context the tangible equity.

Current cash levels, and you know maybe potentially a the depressed outlook for earnings as we think about moving forward.

Yeah, so its Jeremy I I'm not going to speak to how the rating agencies were maybe generally looking at it across the board, but certainly specific to to Markel I mean from a from a debt level standpoint, and a 27% our leverage ratio, that's well within our target range and certainly.

Well within.

What the rating agencies are comfortable with won't come to the surprising we certainly are in discussions in previous earnings releases, we would typically per quarter with significant events. So we've been speaking to each the radiancy.

Because we have been acquisitive overtime right to point out that they will look at to varying degrees the level of goodwill and intangibles to shareholders equity, but again I would say, while we're at the higher end of the range of kind of what they look at Theres a lot of qualitative considerations that go into that as well when they look at the underlying businesses in the Uh huh.

These and cash flow streams from the businesses so.

Nothing on that front I think right now, it's specifically as a net.

Okay, and I noticed in the in the queue that there was a conversation around no goodwill or intangible impairment, maybe you could just give us some thoughts about how that process Werent <unk>.

<unk> businesses this feel as though they most maybe most susceptible to do some form of impairment you know just as we think about particularly in the ventures that <unk>.

Maybe impacted me economic environment moving forward.

Yeah sure I mean again, Jeremy you know first off I think you have seen in observed I mean, there's a lot of cautionary language that we put into the into the queue and we're trying to be very clear of the the things that could respond relative to levels of uncertainty that exist you specifically in the period.

We have a meaningful amount of goodwill and that's because even acquisitive over the years, we looked at all of our reporting units and ultimately we determined that it was not more likely than not that the fair value.

I'm sorry, it was more likely to not to the fair value exceeded the carrying value for each of our reporting units and we didn't feel like yet at the end of March but there was really kind of a triggering event. So we realized significantly on qualitative considerations and sensitivity analysis and looking at sort of the last time, we had done valuations are the various reports.

Yes, we feel pretty comfortable at this stage, we flagged the fact that there's a tremendous amount of uncertainty so the longer the economic shutdown goes on the more impactful that is over a sustained period to our businesses. It's reasonable to think that out there could be the possibility that as valuations would be called into question. That's something that we would be prepared.

We will be prepared to look at overtime.

I would say in part because we've done we've conducted a number of acquisitions recently I think those are some places will look at you know very carefully most carefully because there's been less time since the point that we did you original valuations the face of as businesses.

And there's a there's quite a bit of disclosure in the queue that will lay out some of those key kind of considerations and assumptions and how we think about as accounting requirements.

Got it thank you.

Our next question comes from Rob.

Well I guess please go ahead.

Yeah, Hi, Ah thanks, very much just too.

[noise] follow up on the goodwill and intangible question I think I know the answer to this but just looking for confirmation here, none of the goodwill or intangibles being reviewed our held as an admitted asset with insurance companies.

That's correct.

Okay great.

And then the a the Q also mentioned that the ventures businesses could look to potentially increased borrowings to help get through this period of time, we're certainly seeing that across the board within various other industries.

Could you remind us again, how much the insurance companies have loaned into the ventures business.

I have those balances increase since the end of the quarter and are there any sort of regulatory or internally mandated limits on how much the insurance companies can lend into these entities.

Yeah, I'll, let Jeremy chime in but basically from the bottom up point of view businesses themselves. They tend to operate with relatively low.

Levels of debt Theres some of those companies that have.

No that at all they would have a normal working capital lines with the banks that that they would work with.

Given that the normal flows of their of their business, but there is part of the language in the case was just given the uncertainty and the way of credit options that were.

Being placed out there in the marketplace, but it was appropriate add that language, but they.

Mike avail themselves to some of those things as of yet they they have not.

Yes, and the amount of debt with the insurance subs. His has not moved meaningfully since the end to end the year I think that numbers actually sort of disclosed out can the in our footnotes in the in the 10-K, so I want to put that figure right now that and then with regards to sort of limits in place.

Our limits in place and the uptake, but internally and then in conjunction with what we've agreed from sort of the state.

Rules with regards to each of our domestic insurance company. So there are limits two to two when that makes good economic sense and compliance to the to the regulatory requirements.

No. That's a that's helpful. And then last one for me for Tom is did you mention Tom how much is the mark on the equity portfolio.

Change since the end of the quarter.

I would not but that number out but obviously so far in April price has been going up.

Okay.

Great. Thanks very much.

This concludes our question and answer session I.

I would like to turn the conference back over to Tom Gayner for any closing remarks.

Thank you very much for joining us we look forward to connecting with you next quarter be well. Thank you.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.