Q4 2020 Markel Corp Earnings Call
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During the call today, we may make forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 day.
Based on current assumptions and opinions concerning a variety of known and unknown risks.
Actual results may differ materially from those contained in or suggested by such forward looking statements additional information about factors that could cause actual results to differ materially from those projected in the forward. Looking statements is included under the captions risk factors and safe Harbor and cautionary statement in our most recent annual.
Our report on form 10-K, and quarterly report on form 10-Q and earnings release filed on form 8-K.
We may also discuss certain non-GAAP financial measures in our call today.
You may find the most directly comparable GAAP measures and a reconciliation to GAAP for these measures in the earnings press release, which can be found on our website at www Dot Markel Dot com in the Investor Relations section. Please note. This event is being recorded I would now like to turn the conference over to Tom Gayner co.
Chief Executive Officer. Please go ahead.
Thank you and good morning to everyone.
Thank you is the key operative word to start off this message to 18000 employees of Markel for doing a wonderful performance in every dimension in 2020 and I just wanted to start off the call on behalf of a bridging.
Richie and Jeremy and everybody, taking the associates of Markel for their work throughout 2020, it was not an easy year.
Markel as a holding company and I think the thing that we hold most dear our ideas and our values of taking care of our customers and our associates do you think that creates a win win win architecture, where our associates win by being part of Markel, our customers win by doing business with us and our shareholders win because when we do this.
Two things we produce good returns on capital and we think that is the ultimate form of sustainability all.
All three engines of Markel fired in 2020 and provided positive thrust, but it might not seem that way at various points of the year, especially early on in the early days of the pandemic. The great philosopher Mike Tyson said, everybody has a plan until they get punched in the mouth well, we got punched in the mouth in the early days of the pandemic.
But our plan is to build markel in such a way that we can take it.
Yeah, we can get in the range would make Jason we can take a bunch of them out and keep our society. That's 'twenty 'twenty in a nutshell markel as a resilience from machine, our three engines, which stood the blows from the early days of 2020, and our 18000 plus associates adapted and figured out how to recalibrate and accomplish our mission.
I've taken care of our customers our associates and our shareholders I'm pleased this morning now to spend a little time with you reviewing the results and with that I'm going to turn it over first to Jeremy noble our CFO to discuss the numbers Richard will then talk about our insurance operations.
I'll hop back on to talk about investments and ventures, and then we will open it up for your questions with that Jeremy. Thank you.
Thank you Tom and good morning, everyone.
Following a year that reflected significant volatility and widespread impacts attributable to the COVID-19 pandemic. We are proud of the results we delivered across all three of our engines in 2020, which demonstrates the strength and resilience of our businesses our underwriting operations delivered an underwriting profit despite elevated levels of catastrophic events.
Significant losses attributable to the global pandemic as we benefited from achieving meaningful rate increases and growth in new business.
Our Markel ventures operations saw strong top and Bottomline performance amid challenging economic conditions, and we achieved solid investment returns despite volatile market conditions and historically low interest rates.
Looking at our operating results gross written premiums were $7 2 billion for the year compared to $6 4 billion in 2019, an increase of 11%. This increase was attributable to our insurance segment, which reported gross written premiums of $6 billion, an increase of 13% compared to a year ago.
This premium growth is attributable to both new business and improved pricing within our professional liability and general liability product lines as well as our personal lines in marine and energy product lines gross written premiums with our reinsurance segment were consistent with 2019 at roughly $1 $1 billion year to date retention of gross written premiums.
With 83% in 2020, which was down one point from 84% a year ago.
Earned premiums increased 11% to $5 6 billion from 2020, primarily due to higher written premium volume in our insurance segment.
Our consolidated combined ratio for 2020 was <unk> 98, compared to <unk> 94 last year.
For the fourth quarter of 2020, we reported an 89 combined ratio compared to <unk> 93, a year ago.
Our full year 2020, combined ratio included $360 million or six points of underwriting losses attributed to the COVID-19, and $169 million of three points attributed to natural catastrophes. This compares to $100 million or two points of catastrophe losses in 2019, excluding the.
Impacts of COVID-19, and natural catastrophes, our combined ratio for 2020 improved due to a three point improvement in our Attritional loss ratio and a one point reduction in our expense ratio arising from improved performance within our insurance segment in 2020 compared to 2019.
With regards to prior year loss reserve development consistent with our reserving philosophy prior year loss reserves developed favorably by $606 million from 2020 compared to $535 million in 2019.
Turning to our investment results net investment gains included in net income were $618 million in 2020 compared to $1 $6 billion from 2019 and were primarily attributable to an increase from a fair value of equity securities, which experienced significant market volatility during the year the impact of significant declines in the fair value.
Our equity portfolio in the first quarter.
Driven by unfavorable market value movements, resulting from the onset of the pandemic were more than offset by increases in the fair value of our equity portfolio over the last three quarters of 2020.
As I mentioned in previous calls given our long term focus variability in the timing of investment gains and losses as we expected and we may continue to see volatility in the equity markets due in part to economic uncertainty caused by the pandemic.
With regards to net investment income, we reported $372 million in 2020 compared to $452 million last year a day.
Klein is largely due to lower short term interest rates as well as lower holdings of lower yields on fixed maturity securities in 2020.
Net unrealized investment gains increased $353 million net of taxes during 2020, reflecting an increase from a fair value of our fixed maturity portfolio, resulting from declines in interest rates.
Now I'll cover the results of our Markel ventures segment.
Revenues from Markel ventures increased to $2 8 billion for 2020 compared to $2 $1 billion last year. This increase reflects the contribution of revenues from our recent acquisition of Lansing building products, which we completed in late April and Vse fire and security, which closed during the fourth quarter of 2019.
And the contributions of Lansing, and Vse operating revenues within our Markel ventures operations decreased compared to 2019 as a result of lower sales volumes attributed to the economic and social disruption caused by the pandemic EBITDA from Markel ventures was $367 million for 2020 compared to 264.
A year ago, reflecting the contributions of Lansing, and DSC as well as growth and improved operating results at certain of our businesses.
At our consolidated results for the year, our effective tax rate for 2020 was 17% compared to 21% in 2019, the lower effective tax rate in 2020 is primarily attributable to a tax benefit that was recognized in 2020 for accumulated losses on certain investments we sold.
We reported net income to common shareholders of $798 million from 2020 compared to net income to common shareholders of $1 $8 billion a year ago.
Comprehensive income to shareholders for 2020 was $1 2 billion compared to $2 $1 billion a year ago.
Finally, I'll make a few comments on cash flow as capital and our balance sheet.
Net cash provided by operating activities was $1 $7 billion for 2020 compared to $1 3 billion for 2019 operating cash flow for 2020 reflected higher premium collections as we've seen strong growth in our insurance segment over the past several quarters as well as greater cash flows from Markel ventures given.
<unk> earnings.
Invested assets at the holding company were $4 1 billion at the end of December compared to $4 billion at the end of 2019, the increase in holding company invested assets was due in part to the proceeds from our May preferred shares offering offset by funds used to acquire Lansing earlier in the year total.
Total shareholders' equity stood at $12 8 billion.
At the end of December compared to $11 1 billion at the end of 2019.
We ended the year with a very strong balance sheet, we are well positioned to be opportunistic around deploying capital including to support growth in our insurance operations given the attractive opportunities. We are seeing in the specialty insurance marketplace that I will turn it over to Richie to talk more about our insurance businesses.
Thank you Jeremy and good morning, everyone.
As Tom and Jeremy have said, we finished 2000 twenty's strong posting an overall underwriting profit with a 98% combined ratio for the year.
While this is not the result, we were aiming for as we enter 2020 after recording $360 million of underwriting losses related to the COVID-19 pandemic, followed by natural catastrophe events from the third and fourth quarter, adding an additional $169 million in underwriting losses. This is an amazing accomplishment.
Sure.
We finished the year with a fourth quarter in which we reported a combined ratio of 85% before the effects of Covid natural catastrophe losses.
We achieved strong growth and meaningful rate increases across most of our insurance and reinsurance product clients and saw reductions in our attritional loss ratios across most of our products in the last half of 2020 as the impact of price increases and portfolio management effort started to materialize.
We continue to seek out opportunities to growth and benefit from the positive insurance and reinsurance market environment and to reduce volatility in our underwriting results as we enter 2021.
So now I will discuss our insurance operations, which include our underwriting operations State National program services operations and insurance linked securities operations.
So starting with the insurance segment gross written premiums for 2020 were up $709 million or 13% and net earned premiums were up $544 million also 13%.
Gross written premiums were up 15% in the fourth quarter premium growth from both the quarter and year was driven by continued strong organic and new business growth along with the impact from rate increases across several product lines, most notably in our professional liability general liability marine and energy and per.
Arsenal line products.
Importantly, virtually all of our growth within our preferred product offerings as our topline growth was impacted in part by targeted reductions on products and accounts that works meeting our profitability goals. We believe our efforts around portfolio construction will continue to improve profitability levels.
Overtime.
The combined ratio for the insurance segment in 2020 was 96 versus 93 last year to.
The three point increase was driven by losses recognized in 2020 from the COVID-19 pandemic, along with several midsized cat events that impacted the current year combined ratio by six and three points respectively.
The impact from Covid and cat events were partially offset by a three point improvement in our Attritional loss ratio, arriving from several product lines, most notably in our property professional liability and marine and energy product lines due to reduced loss experience rate increases and changes in business mix.
We also benefited in the current year from a lower expense ratio driven primarily by the continued growth in net earned premiums as we've sought to key controllable expenses flat.
Turning to the reinsurance segment gross written premiums for 2020 were up $17 million or 2% and earned premiums were up $26 million or 3% per.
Premium growth for the year was driven by growth in our general liability and professional liability lines, partially offset by lower premiums in our credit and surety lines.
The combined ratio for the reinsurance segment was 104, both 2020 in 2019.
The 2020 combined ratio was impacted by seven points of underwriting losses from COVID-19, and five points from natural catastrophe events versus a 10 point impact from Nat cat events in 2019.
Excluding the losses from Covid and cat events combined ratio decreased due to a lower attritional loss ratio across several product lines, partially offset by less favorable development on prior year losses.
2020 represented the fourth consecutive year of underwriting losses in our reinsurance segment, primarily as a result of unprecedented and significant catastrophe activity over the last four years, along with the impact from COVID-19 in 2020.
While there are certainly opportunities in the current market to grow our topline and reinsurance we're going to be very cautious about growth in the near term until we are convinced profitability issues have been resolved by a combination of price increases and portfolio management.
To illustrate illustrates the difference in our strategies in insurance versus reinsurance over the past three years, our insurance gross written premiums have grown at a 13% compound average growth rate.
<unk> is essentially no growth in reinsurance.
Recent results have not been good enough in our reinsurance portfolio and we've not earned our targeted return on capital.
We recognize that reinsurance is a volatile business and volatility is what we're paid to assume as a reinsurer.
We will continue to make adjustments to our core casualty and specialty products and believe we are on track to produce appropriate returns on a smaller more focused reinsurance portfolio.
So next I'll go to program services.
Gross written premium volume for our state National program services operations were down 10% to $2 1 billion for the year driven by the cessation of two large programs earlier in 2020.
This was partially offset by new program business added in 2020.
As a reminder, almost all of these gross written premiums are ceded to third parties.
Program services business continues to perform extremely well producing consistently strong operating margins. We're also encouraged by new business development opportunities and it is clear that there is rising demand for fronting services to help match insurance risk to capital.
Moving to our ILS operations, our combined ILS operations have a little under $11 billion of net assets under management at December 31, 2020.
Revenues from our ILS operations decreased 6% for the year due primarily to the continued orderly wind down of <unk>, which continues to return invested capital as quickly as possible.
Before considering amortization expense the operating loss from our ILS operations in 2020 was wholly attributable to cost of cash.
The majority of which are nonrecurring in nature.
For 2021, the filler has received an excess of $1 billion of new subscriptions today.
This was driven by a proven market conditions and in part by opportunities created with the transfer of our Markel Global re property cat portfolio tuned to fill up.
A portion of this capital was deployed at one one and additional amounts will be deployed at major renewal dates over the course of the year.
The film was also able to establish and are working on a new new investment vehicles. These include an ESG impact fund and our Lloyds Syndicate multi classified.
That being said the pillow was impacted by the elevated level of U S. Net net cat activity in the third and fourth quarters, which impacted their fund performance for the year.
When allowing for cat losses development classes or side pockets.
Anticipated redemption activity and the timing of capital allocation from new subscriptions. The total increased AUM will be tempered to start the year.
Going forward, we feel strongly about the prospects for our ILS operations.
I'll finish up with a bit of market commentary and I'm sure there'll be questions afterwards.
The trends that we've discussed and press past quarters continued in the fourth quarter and at the January one renewables, we see continuing price momentum in almost all lines, our insurance rate and cheap increases continue to average in low double digits and will double digits overall for the 2020 year.
<unk>.
Reinsurance, which has lagged primary insurance pricing close the gap throughout the year, but we're still not as strong as rates being achieved in the primary market.
This situation helps further explain our continued double digit growth in insurance versus roughly flat in reinsurance.
While new entrants and incremental capital raises have had an impact around the edges of the market. We believe that pricing momentum will continue as a multitude of factors such as low interest rates elevated cat activity, social inflation, COVID-19 losses and economic uncertainty.
Are likely to persist throughout 2021 this.
This hardening market has nothing to do with a shortage of capital Unlike previous hard markets capital is actually plentiful.
The factors I, just mentioned are driving the market and all capital, both new and old must face that reality as they price business.
We also believe our business will continue to benefit as the economy recovers from the impact of COVID-19.
While large and midsized business has shown reasonable resiliency to the economic disruptions small business, which is a meaningful part of our portfolio has been adversely impacted.
As the vaccine Rollouts gain traction, we expect small business activity to rebound given pent up demand in the economy.
We enter 2021, well positioned and excited about our opportunities we're laser focused on our goal to deliver a 90% combined ratio or lower for the year with double digit top line growth and we're off to a fast start in January and here in early February.
Thanks for your time today, and now I'd like to turn it over to Tom.
Thank you Richard I appreciate it.
My comments will be extraordinarily brief this morning, Jeremy is giving you the numbers. So I look forward to your questions in the ventures area as Jeremy reported record year $2 $8 billion of revenues $367 million of EBITDA and certainly at different points in the year earlier on.
The only two words that I can use to describe the performance, but the more tough interest group of companies are amazed and grateful they've just done a spectacular job of.
Figuring out how to operate in the world in which we live and they produced record results and as Jeremy alluded to that's a record level of profitability, even without the acquisitions of Lansing and V. S C.
On the investment side, we first and foremost protected our balance sheet and we produced positive returns at the same time following our consistent historical disciplined and sustainable approach. The net of all of this of what's happening in the insurance related businesses. The ventures businesses and the investment operations is that all of those.
Sectors combined to put us in a very strong capital position, which will enable us to play both offense and defense as we enter into 2021 and I suspect we will have the opportunity to both teams on the field at various points during the year. So we're very optimistic.
Grateful for the results that the 18000 plus employees of Markel produced over the years I just wanted to thank you everybody from the efforts and an extraordinary year that we did not have a playbook for us as we entered into it but we're pleased to report. These results to you and we now look forward to taking your questions.
We will now begin the question and answer session. You'll ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the key to.
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The first question is from Phil Stefano.
Deutsche Bank. Please go ahead.
Yes, Thanks, and good morning, I was hoping you could talk about the decision to release.
And I believe it's a small portion but.
At least a small portion of the Covid reserves.
And maybe you can help frame for us what you see as the risk around Covid estimates.
And I guess I'm, just surprised that we're seeing reserves come down already it feels like industry commentary pretty broadly.
Is that the liability lines will have impact over the next couple of years and of course the industry always has this mantra mantra of.
Being quick to recognize the bad news and slow to recognize the good news.
Hey, Phil it's Jeremy I'll start and rich you might join in it was a pretty modest reduction and actually we didn't change our gross COVID-19 loss reserve estimates that is actually a reflection of a little bit of additional benefit from reinsurance and part of that is associated with kind of enterprise aggregate covers that we would have in place it would have been.
By the fact that we had elevated levels of net cat losses. So really the only thing we reflected was a pretty modest amount of additional reinsurance recoveries. We didn't change the gross reserves for which Alan if you want to comment on that yeah, yeah exactly so it really was all about the aggregate.
Cover and some of that benefit from the aggregate cover getting allocated to COVID-19. So gross reserves were unchanged.
Totally agree with you in terms of the uncertainty around Covid reserves.
<unk>.
I think in terms of the two areas, where we have exposure that cancellation I think at this point I think we have a pretty good handle on event cancellation and I don't expect a whole lot of volatility around that.
The business interruption in the U K again now that we've got the Supreme Court decision.
I think most of the areas are laid out and it's a matter of moving to final settlement with the Insureds and I think we feel reasonably comfortable about those reserves, but again. This is the first time any of us seeing the situation.
And then in the U S.
No theres been a couple of verdicts.
Net have probably been adverse you would say adverse to the insurance industry, but the reality is the.
50, 60, or so verdicts that are out there have been positive for the insurance industry in terms of what constitutes physical damage and upholding.
Virus exclusions.
Communicable disease exclusion so.
There is still volatility and potential risk out there but.
We know we are nine months later into a 10 months later into it we know more about it today than we did when it all started and I think we feel as good as we can about the reserves.
Okay No that's.
An interesting point of clarification on the gross versus the net.
And looking at the reinsurance segment I guess two questions within that the first was there any benefit from our profit.
In the fourth quarter that helped the results and then Richard.
Range.
Thinking about.
The topline growth in reinsurance and in your opening remarks, and it feels like so as we get the cat exposed business that comes out and goes through an affiliate instead.
I mean, it feels like this is going to be you know a clear headwind.
Cat exposed business aside is flattish kind of the right way to think about growth for reinsurance in the short run.
Yeah, I think flattish is the right way to think about growth in the short run from reinsurance obviously, we've transferred roughly 200 million of catastrophe business over to net seller.
So all things being equal you would expect gross written premiums to be down a bit this year in terms of our casualty professional and specialty portfolios, but the one thing that is happening and it could change that a bit is just price increases.
We can put the same lines down on.
Treaties, but end up with more premium because of the price increases so.
I don't expect significant growth.
Obviously, we've got over we would have to overcome the $200 million, that's coming out we may not be down the full $200 million.
We could be something short of that just simply because of price increases on treaties.
The first part of your question about our profit.
I don't I'm not real sure what you are talking about them sorry, Phil Yeah. It was it was there a profit accrual that flow through the expense ratio or.
Accrued to the benefit of the reinsurance segment in some way I guess.
When I was teasing out the quarterly numbers and felt like there was a slight uptick from what I would've expected.
Yeah, Hey, Phil in the expense ratio Youre right in the quarter the expense ratio in reinsurance was was up.
Is sort of personnel related expense as part of that is the cost.
Associated with our decision to exit out of property within the Markel Global re division so much more personnel costs from that and then anything on the profit side.
Okay, and just one point of clarification I think there was a 90% combined ratio target was that for all of P&C are just insurance.
For all of P&C.
Got it thank you.
The next question is from Jeff Schmitt of William Blair. Please go ahead.
Hi, Good morning book.
King at growth from the insurance segment, obviously really create rate increases you would center, you know sort of averaging in the double digits, but.
I was wondering how much of.
A drag.
You may be seeing there from lower exposures audit premiums.
Tightening terms and conditions, if youre if youre.
Lowering limits are increasing deductibles are those factors I mean is that a couple of point drag from for the year or is that maybe not as high.
Yes.
No doubt that we've talked about small business has been impacted obviously, a little bit harder by the pandemic.
So some of that business was not there to renew.
And maybe the new business stream is not as strong as a result of that.
We are definitely in places.
Shortly our limits.
And as a way to manage the portfolio and so.
Youre getting a rate increase but you might actually have less premiums because because of the shortening of the limits.
We measured the true the pure rate increase and so it doesn't include things like changing terms and conditions or shortening up limits.
So there is some drag there, but I can't quantify that for you. The reality is I mean, we're up over double digits in terms of our rate increases and were up 13% in growth for the year. So.
There is a little bit more growth than there is rate increase so that suggest to me that net net net there is some new business on top of just the rate increases that we're receiving but theres no doubt there is some drag there and then in addition.
You know, we're always re mixing the portfolio and there was over $100 million of business that we exited during 2020, because it wasn't performing to our to our return hurdles. So.
Our growth was net of having to get out of some of that business.
Okay, and just on that repositioning, which what areas did you get out of kind of what areas are you looking to kind of shift to <unk>.
Sure.
We got out of a couple of programs that were underperforming one in particular that was probably 70 or $80 million. We came off of that program during the year.
Some of our smaller program business.
Camps as an example, social services.
Very little opportunity for growth challenged areas in terms of profitability.
Have gotten out of and where we're really focused is professional liability casualty.
Property Marine and energy were.
We're growing nicely in our <unk>.
Rate increases are not just double digits, there mid to high <unk>.
15 to 20 sorts of increases.
One other line would be the personal accident and contingency in the international space.
That as well yes.
Got it Okay and then just one on on the expense ratio in the insurance segment running at 36%.
It had been high thirties.
Past few years I know you did mentioned just earned premium volume being up.
But earned premium volume growth could pretty good for a number of years I guess.
It's 36 the right.
Run rate to think about there.
Yeah.
We're really continuing to work on the expense ratio is a great point that we've seen that come down our variable component of the ratio really is pretty unchanged for most of the benefit you see year over year is us holding the directly controllable expenses broadly flat.
And sort of ensuring cedar growing net earned premiums 13%.
That's a trend that we can continue to see as we grow. So we've been really focused on trying to hold is that correct and controllable expenses flat and scaling up our operations.
They are sort of in place. So we've seen that really measured over a period of time.
Can you can go back for a number of years and really see the movement in the in the expense ratio. So we're going to continue to work on that and I think we can do a bit better than even where it was for 2020.
Got it okay. Thank you.
The next question is from John Fox of Fenimore. Please go ahead.
Yes, hi, Thank you have a number of questions.
First of all very good results. Thank you.
Thanks, Richie you mentioned.
Event cancellation and I've been doing some reading of course of the Summer Olympics were.
Technically postponed and there's some thought that if they're canceled this year that would be a big insurance industry loss. So could you comment on that point of view and what it is.
From upheld might have.
We did have a portion of the.
Our exposure to the Olympics, we wrote a portion of that.
If if the Olympics were ultimately canceled we don't believe it would have much impact to our reserves.
We sort of took the position that it very well could be cancelled in terms of setting up our reserves.
So we wouldn't expect much change to our reserves if in fact, they ended up having to cancel.
Okay great.
And in your comments you talked about the reinsurance business quote wanted an acceptable return.
What is that for reinsurance.
What type of capital basis that book.
At 900 million of premiums.
I think capital I'd say, it's about.
About one to one in terms of the capital.
And we need the same 90.
Needs. The same 90 combined on the reinsurance I mean actually I would like to see it would be a little bit lower.
I said 90 or better in 2021.
And net.
Now let me just say you know we're coming off some tough performance last few years.
I don't know that I'll report put the reserves up at a 90. Initially we will have a margin of safety, but I wanted to know I am sure. It's it's ultimately going to prove out to <unk> and so that's the goal and Jonathan it's Jeremy it should be a little bit more capital efficient to them and that was part of the decision to sort of.
Property and sort of focus on.
Doing property sort of through net fillers offering.
Obviously net cat on the property reinsurance side as a much more capital intensive product line.
Sure.
It makes sense.
Yeah.
Richard did you give an outlook for our program services and <unk>.
You mentioned a couple of accounts that didnt renew within the fourth quarter was strong do you expect that to grow this year.
Yes, I do.
One of those accounts was one that day.
Received they were upgraded back to a from a minus and so we knew all along eventually that program would go away, we actually were fortunate to keep it longer than we thought so.
So that was always going to be one that was going to take a little while to replace.
The new business pipeline is full right now we really have seen a pickup in activity. So I think we will grow in 'twenty one.
Okay, Great and then just.
Kind of a simple question, but clarification on ILS investment management.
$2 12 up revenue and 231 of expenses.
A loss does that 231 does that include the amortization of goodwill and intangibles.
Now the amortization would be separate.
Okay.
And does your from your comp Oh go.
Go ahead.
I'm just going to say, but it does also include some pretty significant charges related to cash.
Right I was just going to ask about that have you guys quantified that or.
Not at this time, we did not quantify it I mean, I think you can go back in the last quarter and probably get a reasonable estimate of it.
Yes.
I think Richard commented on this earlier is full.
Full year cash <unk> expenses were approximately $50 million pretty significant amount of that would be nonrecurring in nature.
Yes, it's very significant and did you buy any stock back in the quarter.
We did not we stop.
The repurchase plan back in March.
Okay.
Great. Thank you.
Again, if you have a question. Please press Star then one the next question is from Mark <unk> of RBC capital markets. Please go ahead.
Hey, good morning, just to just a couple that hasn't already been addressed.
Down in the products services and other segment, there was a $41 million charge related to the Latin America.
Our reinsurance segment.
Is that a goodwill write off or is that a an underwriting loss. The description that it wasn't really clear what was happening there yet.
Yeah, Mark it's Jeremy let me, let me try to clarify that so.
Go back 2013, when we acquired Alterra, we inherited a small Latin American reinsurance operations really over the course of the past 24 months, we've been winding down our Latin American operations and this would be an example is when she was talking to you before not really a core product offering and not really sort of meeting profitability and return targets for us to last <unk>.
Meaning piece of our sort of exit is a sale of a small Brazilian reinsurance company and we're in sort of active negotiations in that space and hopefully we'd have a transaction later this year because of the intent to sell from an accounting standpoint, we recognize that loss, what's important to reflect a little bit of the accounting so.
You'll also see in the in the quarter, a pretty large cta gain in other comprehensive income in the accounting rules require us to crystallize the accumulated cta loss and reclassify that into an operating into operating income as an operating loss. So we've got that in.
The reinsurance segment outside of the combined ratio that $41 million you alluded to that's largely offset by a corresponding cta gain because of that reclassification. The actual book loss is pretty is pretty small.
Okay, alright, so ultimately.
It's primarily an accounting was there any material amount of premium associated with that sounds like you had pretty well run it down to a de minimis amount over the last couple of years. It was very de Minimis.
Got it.
Okay.
The second question that I had.
You've commented on.
Goal of 90 or better combined ratio true.
My recollection is maybe the first time you've ever set such a goal publicly so thank you for that.
But more specifically.
Do you contemplate that.
We're getting.
Would you perceive most of the improvement from here to be primarily loss ratio driven or do you think that theres any meaningful amount of expense ratio savings that can be further generated from here.
Well.
Both both I think there is probably more on the loss ratio side at this point.
I made a point of the 85 combined in the fourth quarter before cash and before Covid.
We're we're hoping there is not another COVID-19 type loss in 'twenty, one and we have significantly reduced our cat exposure.
By the end of 2020, so I would expect our comp.
Normalized cat load to be less.
In 'twenty one.
So.
You know I feel like we are.
There in terms of a run rate to produce nine your blood.
And then Jeremy spoke about the expense ratio.
We continue to scale the business and we're holding the line on our controllable expenses. So our goal is to drive it lower than the 36, we reported this year.
Got it. Thank you that's very helpful.
Last question, we haven't heard enough from Tom you have from going to ask you a interest question.
Yeah.
Obviously this year was a difficult year.
Number of sensors for the multitude of business units in there.
What what are the key sign posts, you're looking for as far as reopening.
Kind of get the revenues, particularly in the units that saw revenues decline to get those back.
Running positively again this year.
Sure.
Well.
Again.
And grateful of the words that I would write for what happened in ventures. When we looked at the economy being shut down in April and May and order books that just disappeared.
Coverage that has already taken place is spectacular and that's a tribute to the management teams that run those businesses and the the Workforces are just figure it out.
For instance, <unk>, which makes the wood flooring for trucks as the as the gentleman, who runs that said you can't make wood floors from home. So that work force figured out a way to operate safely and make wood floors and capture a pretty good amount of business that started to show up in that in the second half of the year.
The most economically sensitive section of debentures group would be things that are related to transportation and the various trailer businesses and I can tell you those businesses are already picking up into the fourth quarter was pretty nice in their order books are way way better than what they were earlier in the year. So I don't think there's much that I can control.
About the general economic conditions, that'd be like thinking the weatherman for a sunny day, but has the weatherman I would predict that the conditions are getting better.
Okay. Thank you that's helpful.
And I know many other questions. Thanks.
The next question is from Mark Hughes of true. It. Please go ahead.
Yeah. Thank you good morning, I Wonder if you could talk about kind of frequency and severity as you saw develop through the year and anything related to Covid and the shutdown and then.
Maybe social in place and you mentioned that as a continuing driver or range.
The momentum do you think there is some pent up demand.
Maybe courts opened in 2021.
Yeah.
Hello, everybody.
We think frequency is about the same.
In terms of severity, that's really where you see.
That's really where you see the social inflation showing up the nuclear verdicts that things of that sort.
That's why that's part of the reason we're shortening limits. That's part of the reason you buy reinsurance you try to do things to manage that and we do believe.
The rate increases we're achieving now.
Our running in excess of trend at this point and they need to.
I've said that we need to be at a 90 or less.
To generate appropriate returns on our capital and so you know that that net margin that we've been generating has been needed.
So.
You know I think frequency, we're seeing about the same severity is where we're seeing it go up.
Thank you for that on the Cat exposure you pointed out how the normalized cat load less in 'twenty, one any other metrics you can share sort of specifics on the premiums.
The cat exposure or a maximum loss numbers.
Give it to them.
A better sense of that change.
Probably the best thing that could give you is.
Each year, we sort of work up a cat load in terms of our combined ratio and Jeremy keep me honest here with that had been about three points for 2019, and it's probably less than two.
Gives me from 2021, probably.
Probably less than two points.
'twenty one yes for example, our global re division that property book I think ended up writing growth maybe $220 million. So certainly less net so I think thats in the press release, but that would be a good example of it.
Majority of that business will not be on the books in 2021.
And then if I might just a couple of specific numbers and I'm, sorry, if I didn't back into this properly the expense ratio for the insurance segment and then the reinsurance segment for Q4.
Yes, sure the insurance expense ratio was about a 35 and for reinsurance I think it was about 36.
Thank you very much.
Thanks Mark.
And the next question is a follow up from Phil Stefano of Deutsche Bank. Please go ahead.
Yeah. Thanks, a quick one on the the 90 combined guidance if I got the impression in response to an earlier question that the right way to think about the 90 is a.
Fully developed number but of course, there could be some level of conservatism to the to the reserving basis sit on that I mean, how should we think about this 90 as you know our reported versus a fully developed number.
90, I'm thinking in terms of the 90 is reported.
Hello.
If we have a margin of six we obviously will include a margin of safety in both our insurance and reinsurance operations with that margin of safety I could potentially see us reporting something in excess of the 90 and reinsurance in 2021, and I am hoping for something less than a 98 inch.
<unk> in 2021.
Okay understood.
With the ILS commentary and in AUM update I didn't hear large pine mentioned in there I was hoping you could give a quick update on that.
So much time in terms of results launch fund had a terrific year in 2020.
We talked a lot about small to medium size events. So.
So it was really frequency in 2020 in terms of the cat losses, none of that really got to the retro portfolios and so they had a terrific year mid double digits returns.
On the portfolio the place that we've fallen short is in terms of raising capital.
We're a little short in terms of our capital raising and we're hoping to now with our years track record of note here is that a lot, but you know it is a years' track record, we're hoping that we can get out there and raise some capital here in the first quarter before the Japanese renewals on four one.
Okay. Thank you.
Yeah.
This concludes our question and answer session I would like to turn the conference back over to Tom Gayner for closing remarks.
Thank you very much for joining us we're pleased to be able to report the results that we did to you and we look forward to 2021 and chatting with you again next quarter. Thank you all so much bye bye.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.