Q3 2020 Markel Corp Earnings Call
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Pardon me this tour operator speaking the Mark how meeting will begin shortly I would.
I would like to just let you know that a if you could just continue to hold we won't begin shortly thank you so much.
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Good morning, and welcome to the Markel Corporation third quarter 2020 conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After todays presentation, there will be an opportunity to ask questions to ask.
A question. Please press Star then one on your Touchtone phone to withdraw your question. Please press Star then to join 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.
All righty of known and unknown risks actual results may differ materially from those contained in or suggested by such forward looking statements such as 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 self harbor and cautionary statement.
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, you may find the most directly comparable GAAP measures and a reconciliation to GAAP for these measures in our most recent.
<unk> form 10-Q, which can be found at our website at www Dot Markel Dot com in the investors 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 Emily good morning and welcome.
I apologize for the delay in starting to call. This morning, I understand what are the numbers that was distributed was incorrect connect you to the replay which of course has not happened yet.
Actual call Oh, we've sent out an email with the correct number we see a roster is being assembled in something of a slogan arguments fashion.
Oh gosh for that here on our part we hope others are able to join us in process and the replay will work out as function doesn't we are grateful that you're you're here. This morning.
Good morning, and welcome stated this Tom Gayner here today are Keith Cozza, you know Richie Whitt and our CFO German double glass.
Glad you joined Us and we look forward to briefing you on current conditions as well as answering your questions.
I'm not telling you anything you don't know when I say that 2020 remains unlike any other year.
Systemic challenges of because it 19 pandemic and all that following its way remain intense and unrelenting.
That said I could not be more proud of the efforts of everyone. In this organization can truly serve our customers our associates and our shareholders in the face of adversity.
We've provided for claims and financial assistance to our policyholders customers.
To cover substantial losses, an economic cost.
Losses stem not just from the things you.
You see in the headlines regarding the pandemic, but also a spate of natural catastrophes such.
Such as more hurricanes that hurricane names wildfires, a major direct show and ongoing recurring events and circumstances that we see regularly in our insurance operations.
We continue to provide necessary and desirable products and services throughout our Markel ventures operations.
Includes building their machines, the big Brett Thanks to get much more basic are necessary than that and since man does not look like Red Lion. We also produced and provide everything from medical services housing house plants to brighten your day and trailers to convey everything from industrial gases to the car you drive.
We make truck floors to keep the product you need from falling out of the bottom of the trailer technology consulting services to manage and keep track of it all and many other items as well and by the way. We also provide fire suppression services to keep it off from catching on fire.
Doing their best to keep our associate sake and gainfully employed throughout these trying times.
We're also working to produce financial results, which create the capital we need to be able to serve our customers and associates.
For many years and has displayed to the first nine months of 2020, we've built a system at markel to be a resilient and robust company.
We work to serve and Dependably honor. The promises we made we've built a diversified three engine machine consisting of our insurance investments and Markel ventures operations those components work together to fulfill our purpose each and every day, we're delighted to be able to report our 2020 year to date progress in doing so this morning.
Clearly work remains to be done.
While our insurance operations remained mildly in the red to the year to date recovered dramatically since the first quarter shock losses, we recognized that the onset of the COVID-19 pandemic.
Accelerated our pace of making tough, but necessary decisions to increase the durability and quality of our insurance operations, which will be measured by improved profitability.
Our investment operations for reporting profitable results through the first nine months, while that is always to shorter timeframe to draw conclusions about investing those results continue a multiyear pattern of conservative in profitable investing our investments to protect our balance sheet and stand behind the promises we make and they also.
Produce appropriate returns.
Our ventures operations, we produced outstanding results so far in 2020.
The leaders of the ventures businesses adapted and figured out ways to surmount unprecedented conditions and circumstances, I am grateful and amazed for their work and accomplishments.
The performance of our three engines demonstrates the resilience and the spirit of Markel to fulfill our purpose of serving our customers our associates and our shareholders.
We believe in win win win as the fundamental architecture underlined Markel and we're pleased to be able to share how that played out in the unprecedented conditions of 2020 today.
Even more importantly, we hope this update provides you with a shared optimism.
We will continue to evolve and build even more resilience and sustainability going forward at.
At this point I will turn the call over to Jeremy to review the financial details of the year to date. Richard will then follow with some commentary on our insurance and insurance linked Securities operations, and then I will speak briefly about our ventures, an investment engines. Following that we will take your questions that Jeremy thank.
Thank you Tom and good morning, everyone.
Underwriting investing and Markel ventures results continue to be heavily influenced by the effects of the COVID-19 pandemic. Unfortunately, we saw positive contributions from each of our three engines during the third quarter.
Sure. Its operations produced an underwriting profit despite elevated levels of natural catastrophe losses, as well as increases to reserves related to the pandemic, reflecting the strong underlying performance of our business. Our Markel ventures operations delivered meaningful profit demonstrating their resilience, despite economic uncertainty and our investment portfolio also.
Solid gains amid volatile market conditions.
Looking at our underwriting results gross written premiums were $5.4 billion for the first nine months of 2020 compared to $4.9 billion. In 2019 increased 10%. This increase was attributable to our insurance segment, which reported gross written premiums of $4.5 billion, an increase of 13% compared to the two.
Thousand 19 period. This premium growth is attributable to both our growth in our end and more favorable rates within our professional liability and general liability product lines as well as growth in our personal lines product lines.
Gross written premiums within our reinsurance segment were consistent with the 2019 period, it roughly $960 million.
Year to date retention of gross written premiums was 83% in 2020, which is down one point from 84% in 2019 and earned premiums for the first nine months increased 10% to $4.1 billion in 2020, primarily due to higher written premium volume in our insurance segment.
Our consolidated combined ratio for the first nine months of 2012 was a one to one compared to a 95 in 2019 for the third quarter 2020, we reported a 97 combined ratio compared to a 94 a year ago our.
Our 2020 combined ratio included nine points of underwriting losses attributed to encode 19 for the nine month period compared to three points for the quarter.
As I've discussed in the past two quarters, we recognized $325 million, a pre tax net losses and loss adjustment expenses. During the first quarter of this year for those policies in contracts Workover 19 was identified as the approximate for direct cause of loss.
During the third quarter, we increased our loss estimates on these coverages by $32 million and also recognize $15 million of losses on our trade credit product line arising from the economic uncertainty, resulting from the pandemic.
As a reminder, our losses for Cobi 19 are primarily attributed to business written within our international insurance operations, primarily associated with coverages prevent cancellation and business interruption losses in policies were no specific pandemic exclusions exist.
Due to the inherent uncertainty associated with our assumptions surrounding COVID-19, which among other things includes assumptions around coverages liability reinsurance protection duration and loss mitigation factors as well as the fact that the economic impacts of pandemic continue to evolve our estimates continue to be subject to a wide range of variability.
During the third quarter.
Test case of a sample of business interruption coverages for policies written in the United Kingdom was completed with the court's judgment finding mostly in the favour policyholders. This ruling was less impactful to certain estimates in our reinsurance segment, where we increased our estimate of losses and loss adjustment expenses of certain trees. Following increase in estimated.
Losses by our seats.
Within our insurance segment, the ruling did not meaningfully impact the reserves previously established for business interruption coverage given the assumptions, we initially made and our policy terms and conditions.
Our estimate at September Thirtyth 2020 also reflect additional data gathered through increased claims reporting and change in our expected duration of the pandemic, which was most impactful to our event cancellation coverages.
In addition to the explicit provision of losses recognized during the quarter, our trade credit product line has the overall effects of the pandemic continue to evolve further losses indirectly related to the co 19 pandemic are possible and they also emerged within our professional liability and workers compensation product lines, among others, including a reinsurance product lines to date.
We've not seen any other evidence of significant incurred losses, increasing for these secondary exposures.
Our underwriting results for the first nine month by 2020, and 2019 also reflect losses attributable to natural catastrophe.
Our 2020 combined ratio included.
One $101 million or two points of underwriting losses Hurricanes, Laura Sally desires as well as the Midwest direct show wildfires in the Western us compared to our 2019 combined ratio, which included $43 million or one point of underwriting losses Hurricane Doreen and type in fact side.
With regards to prior year loss reserve development, consisting with our reserving philosophy prior year loss reserves developed favorably by $435 million in the first nine months of 2020 compared to favorable prior year development of $337 million in 2018.
Turning to our investment results following the significant declines in the fair value of our equity portfolio. During the first quarter, we have seen meaningful recoveries in the second and third quarters net investment losses for the first nine months of 2020 $231 million compared to net investment gains of $1.1 billion last year.
Year over year decline of $1.3 billion.
As I've mentioned in prior calls given our long term focus variability in the timing of investment gains and losses to see expected. We may continue to see volatility in equity markets due in part to the economic uncertainty caused by the pandemic.
With regard to net investment income, we reported $274 million. The first nine months of 2020 compared to $339 million a year ago. The decline is largely due to lower short term interest rates lower holdings of fixed maturity securities in 2012.
Net unrealized investment gains increased $298 million net of taxes during 2020, reflecting an increase in the fair value of our fixed maturity portfolio, resulting from declines in interest rates during the first nine months of the year.
Now I'll cover the results of our Markel ventures segment revenues from Markel ventures surpassed $2 billion through the first nine months of 2020 compared to $1.6 billion last year.
This increase reflects the contribution of revenues from our recent acquisition glancing building products, which we completed in late April and the acquisition of the FC fire and security, which closed during the fourth quarter of 2019.
Excluding the contributions of Lansing and Dfc in 2020 operating revenues in our Markel ventures operations decreased compared to 2019 as a result of decreased demand attributed to the economic and social disruption caused by the government to pandemic either.
EBITDA from Markel ventures was $284 million for the first nine months of 2012 compared to $219 million last year, reflecting the contribution of Lansing and DSE as well as growth and improved operating results in certain of our businesses.
Looking at our consolidated results for the year, our effective tax rate for the first nine months of 2020 is not meaningful to the small pretax loss in the period. The effective tax rate was 22% for the nine months ended September 32019, and the estimated annual effective tax rate for both periods was 21%.
We reported a net loss to common shareholders of $31 million for the first nine months of 2020 compared to net income to shareholders of 1.3 billion a year ago.
When combined with the contribution of the increase in net unrealized gains on our fixed maturity portfolio comprehensive income to shareholders for the first nine months of 2020.
$260 million compared to 1.6 billion a year ago.
Finally, I'll make a few comments on cash flows capital and our balance sheet.
Net cash provided by operating activities was $1.3 billion for the first nine months of 2020 compared to $712 million in 2019 operating cash flows for 2020, reflecting higher premium collections as we've seen strong growth in our insurance segment over the past several quarters invested assets at the holding company with $3.8 billion.
Into September compared to $4 billion at the end of 2019 and.
Change in holding company invested assets reflects funds used to acquire Lansing as well as a decrease in the fair value of our equity portfolio, both of which were partially offset by the proceeds from our May 2020 preferred shares offering.
Shareholders equity stood at $11.9 billion at the end of September compared to $11.1 billion a year end we.
We continue to maintain a fixed maturity portfolio profit high credit quality investment grade securities with an average rating of double A.R.
Thats a total capital ratio at the end of September 23% down slightly from 24% a year end and we have no unsecured senior notes maturing until July 2022.
We believe we are well positioned to meet our ongoing capital liquidity needs, including supporting the growth in our insurance operations. We expect to continue to see attractive opportunities in specialty insurance marketplace that I'll turn it over Richie to talk more about our insurance businesses. Thanks.
Thanks, Jeremy and good morning, everyone.
As Tom has already said the year as we saw the continuation of the unpredictable roller coaster year that is 2020 in the third quarter.
Despite all that our insurance operations continued to grow nicely and we obtain meaningful rate increases in almost all our lines. Our third quarter was also impacted by a series of small and medium sized cats as Jeremy mentioned.
For which we recorded an aggregate 101 million of underwriting losses in the quarter and those were related to multiple hurricanes Lauro. Sally you say is the direct show and the western wildfires.
As regards COVID-19 losses in the third quarter of 2020, we increased that provision to 374 million that was up from our original $325 million provisions that we established in the first quarter.
While we have revised many of our original assumptions with the availability of additional information in some of those have been positive some of those the negative the largest driver for the increase in our direct estimates this quarter.
Related to the UK High court ruling on the FC a business interruption test case.
That the impact of that ruling impacted.
Estimates within our reinsurance segment.
There were also some increases required as we now expect the impact of COVID-19 to be felt into the first half of 2021 that.
Thats, specifically impacts event cancellation business.
As part of the third quarter 2000, a code 19 provision. We also recorded $15 million of estimated losses in our trade credit product line within our insurance operations and those claims were related to indirect economic impact from Cove is 19.
We're not but for company at Markel cat losses over the past four years, including 2020, COVID-19 losses has significantly impacted all of our insurance reinsurance and iOS businesses.
As a consequence, we've missed our underwriting profitability goals over that four year period and as a result, we've implemented many key strategic changes over the last several quarters designed to reduce the number of but for items that could potentially impact our future results.
We believe the changes we have made and will continue to make will reduce the volatility of our insurance business results going forward.
Given the strength of the current market and pricing trends and the unique capabilities. We have assembled we are bullish about our opportunity to perform and put more points on the board moving forward.
Make no mistake, we're realists and this is insurance and but for events are going to happen. Our goal is to lessen their impact and deliver stronger underwriting results to account for the inevitable inevitable events that will occur.
Now I'd like to discuss our insurance operations, which include our underwriting operations State National program services operations and insurance linked securities operations.
So I'll kick off with the insurance segment gross written premiums for the quarter are up $96 million or 7% compared to the third quarter of 2019.
For the nine months premiums are up $503 million or 13%.
Premium growth for both the quarter and nine months was driven by continued organic growth and rate increases in our professional liability and general liability products along with growth in our personal line product lines.
For the quarter ended September Thirtyth. These increases were partially offset by lower gross written premiums within certain of our specialty programs.
Lower economic activity [noise] real.
Related to Kevin Knight team and due to active portfolio management, where we have discontinued riding certain underperforming lines and programs.
We're taking the opportunity in this market to re mix their portfolio to our most profitable lines of business.
The combined ratio for the insurance segment was 94 for the third quarter of 2020 compared to 92 last year that two point increase in the combined ratio was driven by five point increase in the impact of cat losses, and one point of losses attributed to code 19 exposures, partially offset by lower Attritional loss.
Cost ratio and a lower expense ratio.
The decrease in the Attritional loss ratio was delayed due to decreases in our general liability and property product lines, driven again by premium rate increases.
The insurance segment combined ratio for the first nine months was 100% versus 94% for the same period a year ago. The.
The six point increase in the combined ratio was driven primarily by nine points of loss attributed to COVID-19 exposures and two point increase from the impact of cat losses. These.
These impacts were partially offset by an increase in favorable development on prior accident years losses, primarily in our professional liability and product property product lines.
And a lower attritional loss ratio across several product lines due in part to premium rate increases and lower expense ratio.
Higher earned premiums for both the quarter and year to date within our insurance segment had a favorable impact on our expense ratio and an unfavorable impact on the prior years loss ratio.
Moving to the reinsurance segment, a few weeks ago, we announced that we are creating one center of expertise for the global property cat reinsurance market by close by closing our Markel Global re property Cat unit and having to fill up become Markel single point of entry for serving the property cat reinsurance market.
This move allows us to more fully leverage to fill those market leading competitive position, while also generating operational efficiencies.
We believe that the companies that will win in the future or those who most efficiently connect can connect risk with capital and this strategic move is going to help us do that in the property cat market.
Going forward Mark of local rate will increase its focus on underwriting and growing its casualty and specialty lines under the continued leadership of Jed Rhoads, President and Chief underwriting officer.
Gross written premiums for both the quarter end year decreased slightly compared to the same periods in 2019 in the quarter, we saw higher gross premiums in our general liability lines due primarily to new business written and higher rates on that business offset by lower premiums in our workers compensation and price.
Operating lines due to lower premium adjustments and lower renewal premiums with the workers compensation.
And the unfavorable impact of renewal timing within property.
As mentioned previously significant volatility in gross premium volume can be expected in our reinsurance segment due to individually significant deals and the timing of renewals.
The combined ratio for the reinsurance segment was 116 to the third quarter compared to 103 last year.
13 point increase in the combined ratio was driven by three point increase from the impact of cat losses, and a 15 point increase due to losses attributed to COVID-19 huh.
Partially offset by more favorable development on prior accident year loss reserves.
The increase in favorable prior year loss development was due to favorable development in our professional liability and workers compensation product lines. This year versus adverse development that was experienced last year.
The reinsurance segment combined ratio for the first nine months was 106 versus 99 for the same period a year ago seven point increase increase in the combined ratio was driven by one point increase from the impact of cat losses, and a 10 point increase due to losses attributed to COVID-19. This was partially offset by.
Lower expense ratio and more favorable development on prior accident year loss reserves.
The increase in favorable prior year loss development was due to more favorable development in our property product line, partially offset by adverse development on our public entity product line in 2020.
Next I'm going to touch on programs services and our iOS operations.
As a reminder, our mail from our program services in iOS operations are reported within services and other revenues expenses within our operating results starting with state National gross written premium volume for State Nationals program service operations were down in both the quarter and year to date basis.
That was driven by the run off of one large program and the in force cancellation of another large program, which resulted in a onetime unfavorable premium adjustment in the first quarter. This year.
While gross written premium is down as a result of these two programs, we've seen encouraging new business activity and Weve found a number of new programs that are coming online.
As we move forward.
As a reminder, almost all gross written premium in our program services.
Division is seeded.
Ceding fee revenues were also down for both the quarter in the year due to the lower gross written premium volume over the past few quarters.
Moving to our insurance linked securities operations, our combined iOS operations of roughly 10.6 billion and net assets under management as of September Thirtyth Red.
Revenues from our iOS operations decreased 29% from the prior year's quarter and 8% for the nine month period, both the quarter and year to date periods were impacted by lower management fees at Catco due to lower AUM from winding down the operations and reduction in management fees.
These charts during the wind down.
Phil revenues were down for the quarter due to lower investment management fees as a result of some redemptions in 2020 and an increase in side pocket assets on which management fees are deferred until released obviously the cats that occurred in the third quarter, we had to set up loss reserves for those as.
Well aside pockets and that impacted management fee income.
For the year the filler revenues are up with the deep with the decrease of Nephila investment management fees more than offset by higher revenues from there in GA operations.
Operating expenses for Merrell iOS operations increase for both the quarter and year to date compared to the prior year due to the impact of a legal settlement in the Catco operations higher operating expenses associated with the growth in our Nephila in G.A. operations and startup costs associated with our launch fine operator.
And.
I'll finish with a little bit of market commentary and obviously happy to pick that up when we get to questions.
The trends that we've been discussing in the previous quarters continued in the third quarter. We can see we see continued price momentum in almost all lines.
And we believe that this pricing momentum no minimum will continue as a multitude of factors such as low interest rates elevated cat activity, social inflation, COVID-19 losses and economic uncertainty as a result are all likely to persist throughout 2021.
We also believe our businesses will benefit as the economy recovers from the impact of COVID-19, while large and medium sized businesses have shown resiliency to the economic disruption small businesses, which are a meaningful part of our portfolio has definitely been adversely impacted.
To sum it up after a brutal start to the year with COVID-19 losses, we now have an opportunity to finish 2020 with an underwriting profit.
We're going to need to push hard over these last nine weeks to achieve that goal I want to thank all of our Markel employees, who have worked so hard under difficult conditions to give us this opportunity.
I want to thank you for your time today and now I'd like to turn it over to Tom. Thank you Richie and are investing operations, we earned <unk>, 0.8% of our equity portfolio and 5.4% of our fixed income holdings for a total return of 3.8% after all allocated expenses and FX effects I am pleased with positive returns in the current.
Right.
Strategically I believed that the most important role for investments at this point is to preserve and protect the balance sheet of markel given our views about the general level of trade offs between risk and return on offer today, we believe that our current focus on high quality and liquidity preserve options.
To make different investment decisions in a different environment.
The opportunity cost of our staff seems very low to me. We don't think that we would get paid appropriately for taking meaningful credit duration or many other types of risk right now as such we will stay relatively liquid and ready and able to deploy cash more aggressively when we see the opportunity to earn appropriate returns.
And compensation for doing so.
And our ventures operations I want to be clear the news is excellent.
The managers and teams of the ventures businesses continue to responded superbly to rapidly changing and disrupted business conditions, I am grateful and amazed at their skills professionalism and dedication to their associates and their customers through.
For the first nine months revenues Adventures grew 28% to just over 2 billion compared to 1.56 billion a year ago EBITDA for the nine months increased 29% to $284 million compared 219 million a year ago.
This record setting financial performance was broad based while this is the first full quarter of results from our most recent acquisition Atlantic building products, the entire group demonstrated resiliency and the value of diversification we.
We operate in a ray of different industrial and service businesses that are market leaders in what they do they serve a wide variety of customers and experience economic cyclicality and variability from many factors.
We would normally expect volatility from their results not unlike what we experienced from our investment portfolio. When we look at short term time frames.
That said I think this year's results stand as a dramatic validation of the value of Markel ventures to the overall purpose and future of the Markel Corporation.
For your reference.
Checked my notes from the third quarter year to date conference call from five years ago in 2015.
In that year, we reported revenues from Markel ventures of $784 million for the first nine months and EBITDA of $76 million.
I don't remember the exact economic circumstances and conditions of 2015, but I'm pretty sure. It didnt include dealing with a worldwide pandemics.
Our efforts to build an enduring and resilient system at Markel continue to unfold I'm hopeful that the evidence we have offered to you. This morning about our short term and long term progress provides you with some confidence in our win win win mindset as we seek to build one of the world's great companies with that Emily if you'd be so kind of to open the floor we.
Love to answer some of your questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your headset before pressing the keys to withdraw your question. Please press Star then channel at this time, we will pause momentarily to assemble our roster.
Okay.
The first question comes from sales Stephano from Deutsche Bank. Please go ahead.
Yeah, Thanks, and good morning.
Hey, just going back to the insurance business and the premium volume.
I guess I was surprised that the growth decelerated from the second quarter and it feels like part.
Part of the explanation is that we're taking the opportunity in the market to remix some lines of business. Maybe you can help us think about the extent to which this pressured top line growth how long that may this re mixing take and look just given the opportunity in the market and the extent of pricing.
What are your early thoughts on 2021, why why would we not see double digit growth next year.
Sure. Thanks nil.
Yes third quarter, there were a lot of different things impacting the third quarter, but up.
One in particular was I mean, we are taking the opportunity to re mix and really focus on growing.
Our what we call our green classes, the most profitable classes. So.
We become we've been very aggressive I think this year in terms of moving away from business that wasn't meeting our profitability goals closing some of those down closing down programs.
That would be more we didnt see meeting our goals.
And some of that is.
Thats, starting to add up and that impacted the third quarter.
Also in the third quarter July one is a big day for us and we had a really good July one.
August September they tend to be less.
Busy months for us and that sort of continued this year. So all in all I'm I'm very pleased with the growth we showed in the third quarter, giving all the all the moving parts and all the things we are doing.
Also it's fair to say that the economic struggles has impacted I think small business to a greater extent than maybe larger businesses and we saw.
The massive amount of stimulus that was put into the economy in the first six months.
That that Wasnt there in the third quarter and I think some of that had been used to pay premiums in the first two quarters by some businesses. So we saw a little bit of that in the third quarter.
But I'm not particularly concerned about it we've seen a few of our numbers. So far for October and I would tell you. They are very strong so.
You say why wouldn't we grow double digits in 2021, that's certainly going to be our goal to.
To grow double digits in 21.
Okay got it and sticking with insurance and understand and appreciate that you're you're not <unk>, but for a company.
But when I look at the underlying loss ratio, but for cat losses in co bid there was a pretty good improvement in that Attritional performance I. It can you help us thinking about the potential contributions of rate versus trend any covidien frequency benefit from a lack of economic development.
And the Remixing the business, presumably that's going to have a benefit as well. So it you know if you can just kind of bifurcate all these moving pieces to help us understand what's going on here.
I'll do the best I can.
We've got to a point, where our year to date rate increases a double digit low double digits. At this point so rate is certainly a part of it.
Re mixing is also a part of it we are growing the most in the lines of business that we again call our green classes, which are our most profitable classes. We are shrinking classes and you saw that some in the third quarter that we haven't seen the profitability.
That we would like to see so all those things are at play and yes, we saw very nice decrease in the Attritional loss ratio.
So far in the year and the goal the goal is to make sure but for events.
Don't stop that from being what the result looks like as we go into 2021. So unfortunately for the last four years has been a lot of cat events that is that has prevented what has been some pretty nice underlying performance is prevented that from showing up in our combined ratio and.
So you know we've been taking a lot of steps to.
Mitigate and hopefully reduce the number of those but for the events.
Okay last one for me and then I'll Requeue I was just hoping you could provide a little context on your appetite to grow reinsurance and the potential outlook for for one one.
Well, obviously now mark out local radio is going to be focused on casualty and specialty lines and we do think there is an opportunity in the casualty and specialty lines to grow we're seeing rate increases.
I talked about we're seeing increases in our general liability reinsurance programs and some of that or some of that is obviously new business. We're riding that a lot. Some of that increase is also just underlying rate increases and the primary business.
We're going to be cautious that we havent seen the profitability, we have wanted to see and in those two areas over the last couple of years. So first and foremost is making sure it's profitable and once we are convinced it's profitable we will look to grow in this environment.
Got it thank you.
Our next speaker is Jeff Smith from William Blair. Please go ahead.
Hi, good morning.
Could you speak to the M&A environment for Markel ventures, I guess I'm wondering if the tough economic conditions are just sort of creating opportunities where some targets maybe temporarily impaired looking for a partner on an off year.
If you do those types of situations or other opportunities popping up here in this environment.
Yeah. Thanks, Jeff This is Tom.
I would say if there is a lot of M&A being done but not at prices that were going to do it.
Frankly over the last three or four years, we've not made a lot of outgoing calls are solicited things, but some some businesses have been attracted to the long term nature of Markel. So we have we have grown almost in spite of ourselves we observe a lot of transactions and we're a rep in air off our heads.
Not in our head looking at the valuation. So I think the circumstance you lay out will probably happen someday, but we're we're kind of watching the break goodbye.
Okay.
And then on the Lansing acquisition, obviously revenues up a ton from that deal, but profit to Markel ventures were up a lot to that from.
Lansing I guess is building products is that or is that struggling now in it and so we could see profitability pick up.
No I watched here from the yeah, Yeah, I want to reiterate that profitability is across the board. So.
Yeah, everybody's feeling opened in one way or another but again I just take my hats off to the to the managers and people to Markel ventures operations that data.
Just grateful and amazed or the two words that that.
Accurately describe the circumstance. So that's not concentrated in any one place obviously the revenue pickup is pretty big laughing because that is a business where I mean, its distribution kind of business. So revenues are disproportionately high compared to EBITDA.
Relative to the rest of the Markel ventures set of businesses that were turned to capital would be similar but it's across the board to the group is doing very well.
Okay.
And just one more on the insurance segment. The I guess, the NPW growth I think you referenced in the Q that a program was put into run off there I think it affected the retention amount what program was that or what was the size of that program as well.
We've put up but.
A handful of programs and lines of business and to run off.
You know that we are not performing the particular, one that I think that was.
Mentioned there was named referred to was a program. It was a program for municipal and it had a heavy property.
Exposure and that had really not performed well and so we chose to walk away from that I think the impact in the quarter was $20 million to $30 million.
Stake is not not not so much the gross yet.
I think it's for a period of time until that program transitions.
We're sort of serving in a front to capacity.
So it influences the net retention versus what we've seen so far on the gross written premium.
Yeah got it Jeremy is right, we're still running that for the next carrier at this moment so.
Hasn't impacted our gross that much at this point, but we're not retaining it net.
So overtime that will come through as well.
And that's a good example, where I think we will find the opportunity to kind of make up for that premium reduction by focusing on.
Profitable classes that were seeing opportunities.
Right Okay.
Okay. Thank you for the color.
Our next question comes from Mark Dwelle from RBC capital markets. Please go ahead.
Good morning, a couple of questions.
The reorganization or change in the property reinsurance business, that's going to need so just talk about that in a little more detail in particular, I guess, what I'm curious about is.
Is that a sector for one one is effective immediately and indeed.
In general terms about how many millions of premiums are impacted kind of maybe using this years year to date as a run rate or something like that.
Sure sure Mark.
It's effective for one one so no one on one business will be renewed on Markel books, and if those clients are interested.
No Phil will offer renewal quotes on that business.
It's about 200 million of premium, it's obviously cat driven premium.
That.
To the extent it is renewed it will renew within them to fill of funds.
Obviously, what that does for us in terms of Markel its balance sheet as it removes that volatility from markel balance sheet and as we go forward to the extent, we want to take cat risk.
It's a cleaner option I think to do it from do it within the federal funds to invest into the fella funds. It it shows alignment with our investors.
It's very easy to calculate how much capital one on allocating to cat. It's whatever the investment is makes that makes that math simple.
And then obviously the fill up with its management of roughly $10 billion of a win them.
They have market presence market clout that you know, we just we're never going to be able to achieve at markel really so the logic just make too much sense in terms of making that move.
Thanks for that night.
The logic that seemed to make quite a bit of sense.
On that same topic are generally in that same topic with the legal settlement Youve now achieved in Catco does that accelerate or change any of the timeline on finalizing the run off there.
No the run off is really.
Dictated by the settlement of the contracts with Siemens.
And the team there has made terrific progress.
Settling.
Settling with seating so I think we're down to about 1.2 billion of a win on which I think is I don't know a billion to EUR. So down from the beginning of the year. So they've they've made great progress.
As is always the case you that last bit takes a while so.
They're working really hard to do it but no that settlement really is unrelated to how long it will take to return all assets to the investors.
Okay.
And then the other question that I had you provided a very helpful table in the Q related to the various co that related.
Charges that you took there are few items within that table, though where it showed that effectively a negative charge, where there's just reclassifications between the insurance and reinsurance segments or was there some actual release of reserves or take down the reserves associated.
Hey, Mark its Jeremy there were a few pockets actually are we reduced our reserves from initial expectation some of that we saw in our us property relative to our initial sort of reserves also within our you know our international book in the UK relative to business interruption.
Kind of commented you know about the sort of the the contrast between putting some reserves up in our reinsurance line associated with the FDA test case, but we really haven't seen the frequency of claims reporting for some of the business interruption relative to our initial expectation fair. So there were a couple of situations where introduce reserves.
Netting against that increases.
Yes, Marty that's right.
I tried to kind of alluded to that in my comments I mean, obviously, we took our best shot back in the first quarter at coming up with reserves for coated obviously since then we've learned a lot more and my guess is we'll continue to learn as we go through this because we've never seen this situation before.
As a result of those learnings in some areas we felt.
Reserves could come down and other areas, we felt reserves needed to go up and my guess is that that will probably continue as we go forward. We will continue to adjust as we learn.
Of the total bucket of sort of 375 ish million dollars is is most of that still in IB an art at this point or has there been significant paydowns relative to that certainly some of the event claims I would think out paid at this point.
Yes, certainly mark I don't feel right to hand, but I think more than half of that is still an IDR. So we've seen certainly we've seen increased claims reporting.
From the encouraged standpoint, and we've had some settlement activity, but there's still a significant amount of that is sitting in the end I mean, our.
And it's a good example, the amount that has been put up in the third quarter, that's principally on on.
Understood.
Thanks for all the answers appreciate it.
Our next question comes from John Fox from Fenimore asset.
Management. Please go ahead.
Thank you good morning, everyone.
Yes, yes, I'm curious what your expectation is for state national.
Mention some new programs coming on when.
Do you expect that would start growing again.
You know I think it will.
Those were big programs that came off in the first quarter and it's you know.
We've kind of talked enough about it one of those programs was very much an opportunistic program and when that company.
Received their upgrade of their of their ratings they no longer needed.
Stake Nationals program services.
Running capabilities so.
Okay I knew that was going to go away and the other one was a little surprising to us not so much that it went away, but how it went away that on a cut off basis and that premium all just moving to the new the new carrier.
But we've seen a number of new programs coming on unfortunately, none of those have been quite as large as the two that went away, but we'll start to see premium ramp up from those new programs and more importantly, we really like the activity were seeing and I think it's just.
You know what's happening in the market, it's a very.
Interesting exciting time in the market right now there's a number of new players trying to get themselves set up to to hopefully take advantage I guess of the conditions and providing services.
<unk> is a very attractive way to get going quickly so were receiving a lot of inquiries.
Okay great.
And you mentioned.
Well I'm not a quote but so.
Yeah, you have not met your underwriting goals over the last few years due to the cat losses and that your re mixing the business.
So I'm, assuming you're aspiring to up a higher underwriting profit.
Can you share like what you are thinking about in terms of you know when you're mixing the business and what type of combined ratio or is it premature for that.
You know John given given the rate increases we are seeing.
Given the interest rate environment that Tom and the team are having to contend with Ah, Yes, I think we need to be around a 90 combined.
And I'd love to see it lower but but I think it's got to be something around the 90.
Because we.
We just can't put the pressure on Tom and team.
To generate returns in this low to no interest rate environment.
Right Okay.
Okay, great. Thank you and then.
I understand there was a.
Settlement in the lawsuit. So maybe you can talk about some of this but.
To the extent that you can.
What is the run rate expenses and profitability at.
Less investment management segments, well I'm going to I'm going to.
It's not going to be an exact quote from Mr. Noble.
Mr Noble and I were talking the other day and Unfortunately, I don't think I've seen on run rate quarter yet.
You know theres just been a lot of noise. Unfortunately.
But here's where we are John I think we have had success in attracting.
New a new win for January one so that will be coming on board.
For 2021.
Okay. So the two things the two things that.
Impact our ability to make you know too.
Create a return and I are less or the amount of SQM and how many losses, we have well we can't do much about the number of losses, Although I would tell you that the last four years has been brutal but.
But rates are going up substantially so I think that business is going to be better price I know that business is better price going forward, giving us a better opportunity to earn on that for our investors and us earn fees. So.
You know that really there really hasn't been a good run rate quarter, yet, but I think going into 21, we've got some momentum both in terms of rate increases were receiving and so the profitability of the business, we're writing and investors.
Signing up to invest in the funds.
And John if I can tag on to Richard to answer because there's one very very important nuance and I think often gets lost in the communication of how this business works and.
And its newness.
She to Markel, so when we talk about the losses that occur in the old days. When we were writing that business on our balance sheet that would be dollar for dollar our capital that would have a loss. It would show up in the combined ratio for the business. We write this is where we're managing other peoples capital. So the loss ratio really has a profound but.
Indirect effect on the management and performance fees. So there's there's exponential return on our capital when industry losses come in.
More.
Lower level than what they've been up the last couple of years and to Rich's point about we haven't seen a normal run rate we've not been in an environment, where you start to see kind of what your normalized expectation management and performance fees that that Phil has indeed earned over many years and we would expect to normally describe the business.
I will let lobby.
Thompson. Another question. So if I think about traditional asset management, which everyone on the call familiar with.
You would take.
Average at U.N. tons of C.
Yes, I do that I get about 140 basis points others on missile.
Revenue annualized.
And that would be my revenue in that sense.
Profit margins and investment about 30% on average so.
But it sounds like there's a third dimension, which is the amount of loss cat losses.
Also.
Well, here's the thing so like traditional asset management.
If you were talking about.
A company that manages mutual funds where performance fees have historically not been part of it your math is exactly that its assets under management times the times the management fee minus the expenses boom shock lockup, there's there's your profitability in right now the 2.0 version of investment managers and there's plenty.
All of them out there that's only part of the equation then theres another variable of performance fees based on how well you did for your investors and that's that's the the aspect that just highlighting here.
Yeah, Okay. So it's really dimensions not to correct. It so.
So you know John obviously, given the last four years, there hasn't been a lot of performance fees earned because there's been pretty pretty.
Above normal or above previous normal cat activity.
So that's impacted it and also you know there is this this business is highly Leverageable you know it 10 billion of assets under management. It would look very different under 12, or 13 or 14 billion of assets under management, because we really don't need to add a lot of additional cost to manage that Russia.
We can scale the business pretty substantially.
Right.
Okay. Thank.
Thank you that's good clarification. Thanks.
Our next question comes from Phil Stefano at Deutsche Bank. Please go ahead.
Yeah, Thanks for the follow up.
Richie I'm in the 90% combined ratio goal that you had talked about I assume that that's the reported number that includes cats and all that but for US yes. It absolutely pollutant cats and bus fourth yeah, we need we need to get to that sort of level I think given the interest rate environment and how do you think about the dynamics.
Pricing versus where you stand today and getting there over the next couple of years.
You know I feel I feel very bullish about that I think we talked with you first set of questions about the improvement in the underlying attritional.
So you know I think I think there's more room for that to improve and we've obviously been working very hard to reduce volatility from cat losses. So.
You know I I'm bullish as we go into 2001.
Okay and the last one is it a numbers question on ventures can you help us frame the contribution that Lansing could have over the next couple of quarters or what we could expect maybe there's some seasonality to the business as we think about the revenue growth into mid 2020.
One.
Yeah, I think when you look at the quarter given current business conditions.
That's a reasonable run rate kinda kinda revenue thoughts that you should have a typically seasonality building products tend to slow down a little bit in the wintertime, we're not seeing that right now just a things housing related are white hot.
But we'll see how it goes and we've not owned in long enough to give you any seasonal pattern other than common sense would tell you that.
Construction tends to be more warm weather the cold weather.
I didn't see a standalone Lansing number is that something you have at your fingertips for the benefit in the quarter no.
Right. Thank you part of Markel ventures that stock and the whole thing.
[music].
Our next question comes from Charles Gold Some truth. Please go ahead.
Hello, gentlemen.
I have a why not instead of a buck for.
Uh huh.
You bet.
As Doug.
The pacing.
Horrific conditions, whether they're fires or storms or cope with.
And yet you have maintain that.
<unk> equity the company during this.
Terrific period.
Over my many decades in this business I've seen many companies have had.
Share repurchase plans.
Not by when.
The price was low but by when the price was high and I know you're very attuned to.
Value when you make that decision, but the skies, if the skies are not perfectly blue now, but it seems like you are visiting times, when they're going to get a lot lower than they are.
Currently the pricing was good.
Interest is doing well.
I feel good about.
Oh, the insurance arms.
Why not take the hand comps off statement.
That you are not.
Open to buying.
Shares back today, you got cash I believe of four and a half billion dollars I've never seen if that's correct I haven't seen that ratio too.
Value for the company and your history.
Why.
Wait for the last cloud to clear.
To have the ability to pull the trigger.
It is to do so it doesn't mean you have to.
In the last quarter of the year, but you would have told the market.
You want to have that arrow back in your quiver and you may or may not use it right.
Right. Charles This is Tom Thanks for the question and really the long 10 in the poll from my point of view is the regulatory and rating agency environment that we continue to need to be sensitive to so in the environment, which we continue to be in the current growth rate.
Well, we're experiencing in our insurance business has regulators and rating agencies being very particular about the amount of capital we have and the form in which it has helped so.
We continue to work with them to try to make them as comfortable as we possibly can and that's an ongoing process and at the point where the growth rate.
Slows down a little bit that will actually free up sort of the regulatory capital raising agency capital that we need to be sensitive to for for the insurance business, but other than that I agree with everything you said.
Well then the other signal would be insiders consider doing have we buying says.
They see things going so well.
From your mouth to gods there.
Just give me the phone call I can.
[laughter].
Okay.
And our next question comes from Bob Stein, and Boenning and Scattergood. Please go ahead.
Yes, hi, there good morning, I, just maybe one more question for Ritchie on the reinsurance segment.
Obviously, if you included the cat losses, I think I've looked at last night, you know the cumulative loss over the last 10 years adjusted those but for cat events have been pretty sizable it seems to me that by consolidating the property cat business units fill that you are going to be losing a lot of volatility in that segment. So my question is more.
Sure.
If it's going to be looking more like casualty and specialty going forward, what how has that performed and how far away from that 90% combined ratio are those pieces.
Yeah.
It has not performed as well as it needed to Bob.
Is what I'd tell you that I cant remember whose question it was but I've said before we're growing we're going to make sure. We've got it at the right price at the right level of profitability and you know, we're we're seeing really nice rate increases on the primary side not all of that has.
Flowed through to reinsurance yet so we're going to be watching that really closely.
But.
I I am bullish on our opportunity to get back to a great two a good profitability level.
But I think it is I think reinsurance is a little behind prime area at the moment.
And so we're going to keep working on it and once once we are comfortable you'll see us grow it.
Okay. So.
My point is already the reinsurance that we take $200 million of the property cat out.
Maybe take a lot of the catastrophe losses out that kind of get kind of a way to back into what the other other pieces have how they performed over time I think yeah, obviously the kobin.
You probably consider that.
But thats wrong specialty is that or is that sort of cat that.
You bet.
Mostly coming out of the property policies not entirely but mostly.
Okay. All right. Good that's it so is that the right way to think about it and remove a lot of the cat exposure the cat losses.
Premium out and then maybe give me a run rate of the reinsurance sector going forward.
Yes, and what I would tell you is if you do that math.
That combined ratio has not been good enough and you know the market had been softening for probably going on eight to 10 years. So we have been increasing rates or at least the last two years and you know I think it's on the right track up but.
But it's not it's not where prime areas, yet and that's why we you haven't seen growth there yet growth is available.
We don't want it until we're absolutely positive the profitability is there.
Right understood. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Tom Gayner for any closing remarks.
Thank you very much for joining us. Thank you for your long term support we look forward to connecting with you again next quarter. Thank you do well.
This conference call is now concluded. Thank you for attending today's presentation you may now disconnect.