Q1 2021 Markel Corp Earnings Call
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Recent form 10-Q, which can be found on our website at www Dot Markel dot com in the Investor Relations section. Please.
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.
Thanks, So much good morning, and welcome to the Markel Corporation first quarter Conference call. This is Tom Gayner, and I'm joined today by my co CEO Richie Whitt.
And our CFO Jeremy Noble the purpose of today's call is to give you a brief update on our business and the answer any questions you might have about markel.
Well the difference a year makes in my opinion, the first quarter of last year ranked as the toughest 90 days in the history of the Markel Corporation.
Felt more like 90 years, the 90 days this.
This year's first quarter reported better lives.
Net.
A year ago, despite the very real tangible and intangible cost from the shock of COVID-19, we pressed on the persistent the people of Markel demonstrated the resilience skills and adaptability.
And they produce significant rebounds in every aspect of our business as the year went on.
Today, we're pleased to report to you another milestone of progress each of our three engines of insurance investments and Markel ventures produced positive results from the first quarter and we're optimistic about their prospects.
No. We've got more work to do there is always more work to do.
We're excited to be able to report the results from our insurance operations that are in line with our stated goals of growth and profitability that we outlined in our 10 five one initiative. We are pleased with the improved profitability and risk reductions in our reinsurance business.
We're earning appropriate and disciplined returns from our investments Markel ventures continues to earn excellent returns, which increases the durability and value of the Markel Corporation and were optimistic that we will achieve meaningfully better results in our insurance linked securities operations, Jeremy will review the headline numbers from the quarter and then Richard.
We'll cover the insurance ILS and state National operations I'll come back to chat about investments and Markel ventures, and then we will open the floor for questions that Jeremy.
Thank you Tom and good morning, everyone.
As Tom said, what a difference of your mix or first quarter of 2021 results showcased the benefits that come from operating our diverse three engine model with our insurance investments and ventures operations, each performing well and adding value in the quarter.
Looking at our operating results gross written premiums were $2 2 billion for the first quarter of 2021 compared to $1 9 billion in 2020, an increase of 13%. This increase was largely attributable to our insurance segment, which reported gross written premiums of $1 6 billion.
An increase of 16% compared to the same period of 2020.
<unk> increased premium volume reflects both strong growth in new business as well as ongoing favorable pricing trends both of which are most prominent within our professional liability and general liability product lines, but also experienced within our personal lines, the marine and energy product line.
Within our reinsurance segment gross written premiums increased 4% of $533 million also reflecting growth in our general liability and professional liability product lines, partially offset by lower premium volume on our property product lines, given our decision to transfer this portfolio to the fill of late last year.
The retention of gross written premiums was 87% in 2021, which is up two points from the same period last year, primarily driven by changes in the mix of business within our reinsurance segment.
Earned premiums increased 13% to $1 5 billion and.
In the first quarter of 2021 versus the same period last year, primarily due to higher written premium volume in our insurance segment.
Our consolidated combined ratio for the first quarter of 2021 was the 94, which included $64 million or four points of losses attributable to the winter storm Yuri.
And $19 million of one point of adverse development of rising from a change in our estimates of the COVID-19 ultimate losses.
This compares to a 118 combined ratio for the same period last year, which included 24 points of losses attributed to the COVID-19.
Excluding the loss impacts of the winter storm, Yuri and COVID-19 in both years, our consolidated combined ratio for the first quarter of 2021 was <unk> 88 compared to <unk> 94 in the same period of 2020 the.
This improvement reflects a four point improvement in our Attritional loss ratio and a two point improvement in our expense ratio.
With regards to prior year loss reserve development prior year loss reserves developed favorably by $91 million from the first quarter of 2021 compared to $104 million from the first quarter of 2020 favorable development of prior action year loss reserves in the first quarter of 2021 was net of the $19 million of adverse development related to COVID-19 that I just meant.
<unk> all of which was within our reinsurance segment on our property product line arising from updated of new loss information from Cds.
Turning to our investment results.
Net investment gains included in net income of $527 million from the first quarter of 2021 and were primarily attributable to an increase from the fair value of our equity portfolio driven by favorable market value movements.
This compares to net investment losses of $1 7 billion.
In the first quarter of 2020 attributable to a decrease from the fair value of our equity portfolio driven by unfavorable market value movements, resulting from the onset of the pandemic.
As I've mentioned in prior calls given our long term focus variability in the timing of investment gains and losses is to be expected. We may continue to see volatility in the equity markets.
With regards to net investment income, we reported $97 million in the first quarter of 2021 compared to $88 million from the same period last year. The increase this quarter reflects the impact of losses recognized on equity method investments in the first quarter of last year, partially offset by lower short term investment income due to lower short term interest rates during the first.
Quarter of 2021 compared to the first quarter of 2020.
Net unrealized investment gains decreased $214 million net of taxes during the first quarter of 2021, reflecting a decline in the fair value of our fixed maturity portfolio, resulting from increases in interest rates during the first quarter of 2021.
Now I'll cover the results of our Markel ventures segment revenues from Markel ventures increased $707 million in the first quarter of 2021 compared to $511 million the comparable quarter last year.
This increase reflects the contributions of revenues from our April 2020 acquisition of Lansing building products, excluding the contributions of Lansing and the first quarter of 2021.
Operating revenues in our Markel ventures operations decreased compared to 2020 as a result of lower sales volumes, primarily in our transportation related and consulting services businesses.
EBITDA from Markel ventures was $81 million in the first quarter of 2021 compared to $67 million during the same period last year the.
The year over year increase is attributed to a gain recognized in connection with the sale of a portion of one of our health care businesses EBITDA from our other Markel ventures operations decreased due to the impact of lower operating revenues and our transportation related and consulting services businesses this quarter compared to the first quarter of 2020.
Looking at our consolidated results for the quarter, our effective tax rate for the first quarter of 2021 was the 20% compared to 21% in the first quarter of year ago.
We reported net income to common shareholders of $574 million for the first quarter. This year compared to a net loss to common shareholders of $1 4 billion from the same period a year ago.
Comprehensive income to shareholders in the first quarter this year was $359 million compared.
Compared to a comprehensive loss to shareholders of $1 $4 billion first quarter of year ago.
Finally, I'll make a few comments on cash flow capital on our balance sheet net cash provided by operating activities was $318 million from the first quarter of 2021 compared to $66 million from the first quarter last year operating cash flows in the first quarter of 2021, reflecting the impact of higher premium volume as we continue to see strong growth in.
Our insurance segment.
Adjusted assets of the holding company were $4 billion at the end of March compared to $4 1 billion at the end of the year.
Total shareholders' equity stood at $13 2 billion at the end of March up from $12 8 billion at the end of the year.
During the quarter, we repurchased just under 20000 shares of our stock under our outstanding share repurchase program.
Overall, a very pleasing quarter from both the top and bottom line with in each of our three engines financial condition of the company remains strong and we are well positioned to take advantage of opportunities in the marketplace and with that I'll turn it over to Richie to talk more about our insurance businesses.
Thank you Jeremy and good morning, everyone.
Our strong momentum from the last half of 2020 continued in the first quarter of 'twenty. One as we achieved a combined ratio of 94%, which includes four points of cat losses from winter storm, Yuri and one point of losses attributable of adverse development related to COVID-19.
Obviously compared to the unprecedented impacts of COVID-19 on our operations and results from the first quarter of 2020, we're pleased to be able to report a solid start.
Two of the year.
Theres non golf, saying that you cant win the tournament on the first day, but you certainly can loses despite starting the year with a slightly higher combined ratio due to the unprecedented winter storms. We believe we are still well positioned to win the tournament and achieve our previously stated underwriting profitability goals for the full year.
Year.
Sure I, absolutely would have loved to start the year on the right side of 90% combined but I feel like we're in striking distance of.
Many of the tail wins, we discussed on our last call remain in play with our ability to achieve meaningful rate increases across almost all of insurance and reinsurance product lines, resulting in reductions in our first quarter 2021, attritional loss ratios.
We continue to find areas to add new business and program opportunities and take full advantage of the call. The current market environment, while also engaging and continuous portfolio management aimed at improving profitability and reducing overall volatility.
Now I'll discuss our insurance operations, which include our underwriting operations State National program services operations and insurance linked securities operations.
So let's get started with the insurance segment gross written premiums for the quarter and our insurance segment were up $224 million or 16% and earned premiums were up $137 million of 12% compared to 2020 pre.
Premium growth was driven by continued strong new business growth along with the impact from rate increases across several product lines, most notably our professional liability general liability marine and energy and personal lines products.
Virtually all of our growth continues to be in our preferred product offerings. We continue to see favorable rating environment within several of our product lines with the exception of workers' compensation and.
And we look to continue to take advantage of these market opportunities.
The combined ratio for the insurance segment for the first quarter was 91% versus 119% in the same period last year.
The 28.
Combined ratio of decrease was primarily driven by the impact of COVID-19 losses in 2022.
Compared to much smaller of cat losses in 2021.
We recognized 39 million or three points of the losses in the first quarter of 'twenty, one related to winter storm Uri vs $293 million or 27 points related to losses from COVID-19 last year.
Besides the impact from COVID-19 and cat losses events within our ongoing operations. We also reported a three point reduction in our 2021 current accident year Attritional loss ratio.
This decrease was driven primarily by the impact of premium rate increases across several of the product lines I previously mentioned.
In addition, we benefited from a two point reduction in our expense ratio due to the impact of higher earned premiums efficiency efforts and expense control.
Turning to the reinsurance segment gross written premiums for the quarter were up $19 million or 4% and earned premiums were up $28 million of 12% compared to last year.
Premium growth was driven by new business due to significant new treaties in our general liability and professional liability lines, where we see attractive opportunities.
We've said in the past individual contracts can have significant impacts on our premium writings.
The growth that we saw in general liability and professional liability really related to three new contracts that we thought were good opportunities in the first quarter.
This was partially offset by lower premiums in our property product line as a reminder, during the first quarter of this year, we executed on our planned transition of our reinsurance property lines from our reinsurance underwriting operations to be managed by our net fill of ILS operations as part of our ongoing strategy.
<unk> to mask to match risk to the most appropriate capital we will continue to see impacts from the reinsurance treaty transition throughout the remainder of the year within the results of our reinsurance segment.
The combined ratio for the reinsurance segment for the first quarter was of 2021 was 109% compared to 115% last year. The 2021 combined ratio was primarily driven by the impact of the cap and COVID-19 losses, where we recognized 25.
Or 10 points of losses related to winter storm here.
The $19 million or seven points of adverse prior accident year development related to COVID-19.
The 2020 combined ratio included $32 million or 14 points related to losses from COVID-19, and.
In addition, the 2021 combined ratio was favorably impacted by a decrease in our current accident year Attritional loss ratio.
Similarly, within our product line property product lines and from a lower expense ratio due to the impact of higher earned premiums.
While our reinsurance segment results are still not where they need to be we achieved significant growth in our more profitable general liability and <unk>.
Professional liability product lines this quarter and saw favorable trends in both our current accident year attritional loss ratio and expense ratio compared to the same period a year ago.
We are working hard to price all of 2021 business to a 90% combined ratio or lower the difference between the 2021 reported current accident year combined ratio and that pricing target is the result of earnings on business written in previous years and our consist.
And application of Markel reserving philosophy, which is to set reserves at a level that are more likely redundant than deficient.
Next I will touch on our program services and ILS operations, both of which are reported as part of our other operations.
Gross written premium volume for our state National program services operations increased by 56% to $612 million versus $393 million a year ago.
Premium growth was due to the expansion of existing programs and the addition of new programs premium in the first quarter of 2020 were impacted by one time unfavorable adjustment of 55.
Related to the in force cancellation of the particular program.
The overall increase in premiums under management also favorably impacted our operating revenues and margin in the quarter.
As a reminder, almost all of the gross written premium within our program services operations as ceded.
We continue to see a strong pipeline of programmed services opportunities in the current market.
Next I'll discuss our ILS operations.
Our ILS operations consist of the results from the filler plus startup expenses related to large pipe for the quarter operating revenues within our ILS operations issuance decreased due to lower investment management fees related to having lower assets under management versus the same period a year ago.
No.
Assets under management at the Silver were nine 5 billion as of March 31 2021.
Earnings also continued to be impacted by cost associated with building and supporting the growth of the fillers to MGA platforms.
As well as preparing for the launch of additional fund investment vehicles the <unk>.
<unk> continues to build and identify new areas of opportunity to deploy capital and launch new investment opportunities.
Finally, I'd like to point out that we made a change in their disclosures this quarter to recognize the runoff nature of the CAC co operations by moving those results out of the iOS operating revenues and expenses and into other for all periods presented.
<unk> continues to make solid progress to the orderly wind down of its operations and currently has approximately $900 million in AUM.
I'll finish up with some market commentary.
Trends in the first quarter were very similar to trends we discussed on our last call. We see continued pricing momentum in almost all lines of the glaring exception I guess as workers comp.
Our insurance and reinsurance rate increases average over average double digits in the first quarter.
Reinsurance pricing, which as we've previously discussed has lagged primary insurance pricing closed the gap some more during the first quarter enduring on during the January one renewals.
But it's still not as strong as rates being achieved in the primary market.
This continuing dynamic obviously explains our continued double digit growth in insurance versus roughly flat in reinsurance.
As we've discussed while new entrants and incremental capital raises certainly of impacted the market around the edges. We.
We believe that this pricing momentum will continue.
Due to a multitude of factors such as low interest rates. The continued elevated cat activity social inflation further COVID-19 impacts and economic uncertainties that are likely to persist throughout 2021.
We do note that there seems to be a much discussion recently of a moderation of rate increases while it certainly does appear to us that rates are not going up at the same pace that they have over the last several quarters, we really do not view this as a cause for alarm.
We're in the third year of meaningful rate increases, which creates a compounding impact.
It would be unrealistic to think that rates could continue to accelerate indefinitely also it's worth pointing out the dynamics of all lines are not the same while D&O price increases are beginning to stabilize cyber prices around the way up given recent loss events and as insurance and <unk>.
<unk> capacity is decreased.
And our view of the overall market picture remains extremely healthy.
We're also starting to see the benefit to our business as the economy recovers from the impacts of COVID-19 people, probably obviously saw.
First quarter GDP, increasing at six 4%.
Small businesses, which is a meaningful part of our portfolio is starting to show signs of recovery and it is showing up in our premium writings.
To sum up the first quarter, we're off to a solid start and are excited to continue to move our business steadily forward over the rest of the year.
For your time today, and now I'll turn it over to Tom Thank.
Thank you Richard.
Intervention operations, the headline numbers show revenues of $707 million compared to $511 million, a year ago, and EBITDA of $81 million compared to $67 million as is usually the case, the there's more going on than what spotlighted in the headlines.
As to revenues the biggest reason for the increase is the inclusion of Lansing.
Typically the first quarter of seasonally the lightest from Lansing as well as several other of our businesses and I would expect normal seasonal increases and profitability as the year progresses.
As to the increase in EBITDA, we recognize the gain from the sale of the facility within one of our healthcare operations I would point out that transaction should give you some insight into the conservatism of the accounting in place at Markel ventures.
We've struggled a bit with our healthcare operations and the fact that we could sell of facility and an underperforming business and that that would yield of gain should give you. Some comfort that we're not <unk> when it comes to how we're reporting our results to you.
For years, we've publicly stated and committed to conservativism in the presentation of our insurance results. We've operated with the goal of being more likely redundant than deficient when setting insurance reserves and I hope you take some comfort from that spirit and that spirit and culture of conservativism exists.
At Markel ventures as well.
For the entirety of Markel ventures. This year's first quarter was a COVID-19 quarter to use the phrase while our first quarter of last year was pre COVID-19.
We've had BC and AED as conventions to describe dates for a few millennia for at least a little while longer I think will distinguish the current era as PC DC and the AC.
Tom Hanks was the first person I heard breakup time into those categories and he is the firsthand veteran of the past personally I'm looking forward to the AC period, but it's not here yet.
I continue to be grateful and amazed for the performance throughout the Markel ventures organization. The results are excellent sales.
Also require more work per unit of output compared to pre COVID-19 circumstances.
Economic activity and order books are very good there is plenty of business to be had and we're getting our fair share of it so.
The filling the orders and producing goods and services is getting harder or.
Our ventures Ceos used new words like supply chain roulette, when describing the daily realities of their business labor shortages and inflation are facts of life. Your team is doing an outstanding job of coping and adjusting with the realities on the ground of what I see in real time from.
Real businesses seems different than many news reports and comments from officials about inflation.
If current economic and financial market conditions.
Conditions continue to prevail, we should enjoy record results in revenues and EBITDA This year from Markel ventures.
In the current pricing environment of very low interest rates and very high transaction price multiples I do not expect us to make sizable acquisitions in 2021, we've got an excellent capital position a lot of dry powder and a great network of Ceos and relationships that keep us connected.
<unk> two opportunities, but I think we're better off focusing on our existing operations and organic growth opportunities at this time.
We will adjust as circumstances change and that ability to change as a fundamentally attractive feature of our overall structure at markel.
On the investment front, we are the 8% on our equity portfolio during the first quarter.
In our fixed income operations, we posted a negative one 3% return which occurred entirely due to rises in interest rates there were zero credit losses in the portfolio.
The total portfolio after all expenses and foreign currency adjustments gross of one 4%.
In any one quarter and frankly in any one year expect a lot of volatility from investments, we make no efforts to dampen volatility volatility artificially through expense of derivatives or the difference between publicly traded mark to market valuation practices versus private self reported valuation marks.
We just stick to the fundamental and basic task of trying to earn the best returns we can over long periods of time.
Currently our capital position is quite strong we've accumulated higher than normal cash positions. Fortunately that cash supports our current growth in insurance underwriting opportunities, which carried the expectations of meaningful returns.
As time goes by and capital continues to build we expect to be able to apply capital to all four components of our capital allocation triage ladder.
We're currently funding the organic growth of our insurance businesses, we've got ample capital to fund growth initiatives within our ventures operations were modestly adding to our publicly traded securities portfolio. We're open minded about potential acquisitions when opportunities arise all as they always do eventually.
And we are of repurchasing our shares we.
We will continue to incur the small opportunity cost of carrying large cash balances until conditions change. We are not interested in locking in low long term rates of return we will continue to be opportunistic as we look at in the investment decisions to close we're pleased with the progress.
The reporting to you this morning.
Got demonstrated wonderful results in our insurance business improving results in our reinsurance business demonstrated wonderful results in our Markel ventures operations appropriate returns in our investment portfolio and Gritted teeth determination to improve results in our insurance linked securities operations, I Love, our culture and I like our hand.
With that the bulk.
The bulk of the opportunity to answer your questions.
We will now begin the question and answer session to ask the question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone, please pick up the handset before pressing micky.
To withdraw your question. Please press Star then two.
Our first question today comes from Jeff Schmitt with William Blair.
Hi, good morning.
The question on the rate levels in the insurance segment I think in both insurance and reinsurance you kind of referenced.
The double digit levels, but youre kind of seeing a stabilization there.
How much of that.
Could you maybe speak to the environment are you seeing higher competitive levels at this point or is there maybe just sort of a pause in consulted completion with the.
Of the courts being closed.
What do you see kind of driving that stabilization.
Okay.
Hey, Jeff it's of Ritchie.
I think I think it is a number of factors.
I pointed out we're in the third year of rate increases.
<unk>.
It gets harder to sell the continued double digit rate increases. After you do that a couple of times. So I mean, there is there is a point at which things have to level off. So I think I think that is part of it we've been through a couple of renewal cycles.
And.
The continued double digit rate increases get harder and harder to sell there's certainly.
The competition always is.
And certainly as rates as people start to see rates go up and they have their opinion as to where those are versus rate adequacy, obviously the higher they go the more people feel like hey, that's a that's a good risk and I should maybe jump in on it.
So I think I think it is just the signs of a healthy market.
That is what's going to happen.
As I've said I mean, we really.
Did not see.
Mike I mean, we were pretty flat quite honestly in the first quarter.
Looking at rate increases versus fourth quarter, I know some people talked about being down a bit we were sort of flattish and that growth, maybe we will see that growth.
Below flat in the second quarter, but still double digits in both insurance and reinsurance.
Okay.
And then in.
The reinsurance segment just looking at that.
Underlying loss ratio down a fair amount of high Fifty's. The thing is 58 historically.
Mid sixties.
And I think you'd referenced a lot of that is just a mix shift as you exit the property cat.
This.
Is that the case I mean should we think of kind of high <unk> being more of the run rate there versus mid sixties I think it's the same with the expense ratio is down at 30, I think that looks to be mix shift related is that I'm just trying to think of the run rates in these items with that property cat business out.
Sure sure Yeah, I think I think both of those are a little abnormal just as a result of what we're doing in terms of property.
And some of them to some of the other issues that happened in the quarter.
I think the low <unk> is probably about the right place in terms of an attritional loss ratio and maybe a tick higher on the expense ratio.
We are pricing.
I'd say this in my comments the team is trying to price everything at a 90 or lower that they're putting on the books, but we're not going to see that show up in our results for a while and two reasons, we're still earning premium that was put on the books in prior years.
Maybe you didn't have as strong of rate increases and secondly, just our conservatism, we want to be more likely redundant than deficient.
We are coming off of a few years of tough performance in reinsurance.
We're going to be from Missouri in terms of the results for.
For a while so.
While we're pricing it at less than 90, my goal would be something in the mid Ninety's in terms of what we could do this year.
Right Okay.
And then just one one kind of broad comment just looking at the compound annual growth rate of book value I think over the last five years.
The 9% stock price has increased at about 5%.
You of any general kind of thoughts or comments on that and I mean is there an opportunity there to maybe increase.
Share buybacks at all to help the stock price.
Yes, there is and we're doing that.
Okay.
Thanks for the answers.
Absolutely.
Our next question comes from Mark Hughes with trailing.
Yes. Thank you good morning.
On the reinsurance business the.
You got the positive growth despite the.
The remainder of of your property exposure I think you've mentioned three program in particular, when we think about the balance of the year are those program is going to continue to make a contribution or are we looking at the positive top line for reinsurance.
No.
The deals.
And they add up to around $90 million in reinsurance individual deals can be elephant hunting. So.
So we found three deals that we really liked in the first quarter I can't be certain we will find three deals in the second quarter or any deals in the third or fourth quarter. So we're going to be very opportunistic the rest of the year and if we think there's good deals out there that we want to right, we'll put them on the books, but if not.
<unk>.
We could be down quarter to quarter. So this year.
Here is all about profitability and being opportunistic so it's going to be a little hard to give you guidance on how the next three quarters play out in terms of premium volume.
Yeah.
Understood on the retention within the reinsurance of the dump this quarter I think you talked about mix.
Depending on what comes in the door is the retention likely the day more elevated.
Yes. It is.
Our retention on our property business were lower because of the cash protection that we bought reinsurance protection that we bought we tend to keep much more of our casualty professional in the specialty business net so those retention should should go up.
And then in the NAV.
Phil you talked about investments that you're making.
That's where.
Flat to down a little bit in the.
Order when do we start to see more forward progress.
With the bill at the at the <unk>.
Bottom line.
That's a great question I can tell you.
<unk> been frustrated.
We feel like we make two steps forward and then Theres a step backwards.
Here in the first quarter.
And we have losses in that obviously reduces <unk> reduces fees.
It's been a tough four years in the iOS business with with the cats.
But we can't make excuses, we have to figure out of way to get our business moving forward. So.
Certainly.
We project the business moving forward the rest of the year and certainly wanted to move forward in 'twenty, two and onwards, but.
You know we've got work to do.
There's no other way to say it we've got work to do to get where we want to be in ILS and.
Part of that is.
Hopefully fewer cash.
The bigger part of it is getting the right the right price for the exposure, so I I and a lot of other people believe prices need to continue to go up for cat risk.
Yes.
One more question the.
Tom You mentioned inflation I, just wonder how you feel like the ventures businesses positioned in the core inflation.
And what you might be doing in the equity portfolio of U S.
Shifting.
On the assumption the inflation will be worse than the broader market assumes.
It would be my expectation that the actual inflation that has really taken place from the ground is more of them with the headlines would report.
All of the managers, who live and eat and sleep and breathing business is every day. They are doing the best they can the controller cost to get their supply chains, humming and working and making sure that theyre charging appropriate prices to earn of earn a good margin of.
Whatever the product or service there.
That's true every day, that's true in the public securities portfolio of the company as we look at and we're really looking for the same kind of behavior from the managers of our businesses of Markel ventures as we expect from the managers of the publicly traded companies that we're investing in and that really doesn't change whether inflation is low or high but.
I don't want to be caught of asleep at the wheel and not aware of the heightened sensitivity and focus that I think should be applied to that that line of thought these days.
And some of that.
And I think I mentioned it in the comments, we think the dumbest thing you can do right now is to lock in low long term rates of return. So we don't kind of the geniuses in the smartest people in the room, but we try not to be the dumbest. So as long as we don't do stupid things to good things compound.
Thank you.
Yeah.
Yes.
Our next question comes from John Fox with Fenimore asset management.
Yes, good morning, everyone of a number of other questions.
First of all the Ritchie on the.
The COVID-19 losses.
In reinsurance.
Just curious I mean thats to be expected, it's obviously as Tom said, it's still an ongoing situation.
I'm just curious on the logistics of that is that some loss of the Pops up you get notified from.
One of your carriers that your reinsurance.
Is it new information for them and just could you just talk about the logistics of how that comes about.
Well certainly as a reinsurer.
A bit of a delay in the reporting.
<unk>.
Obviously COVID-19 is the situation that's developing and Pete it's the first time people of early seen the situation. So.
It is taking a while for people to get their heads around how the losses might flow through the system. So I mean, what we're seeing is notifications that.
Mostly what we're seeing is notifications that people may be sending losses to us I think there are very few instances of actual hard.
This is a law that were going to be putting to the treaty.
So.
The the great majority of what we have up today.
The reinsurance operations as <unk>.
Okay.
My sense is it's going to take quite a while for it all to play out all of the language has to be reviewed there is probably going to be some negotiation between the seasons and the reinsurers I wouldn't expect this to be resolved quickly add.
It's just prudent to hold the IV and are at this point.
Okay, great. Thank you and then.
By my calculations, which may not be correct.
I've been looking at your accident year, you know every quarter, which.
At least by my quota has been running 105, plus for a lot of quarters. Historically now it's closer to a 100 or maybe even 90 899.
And I'm just like you to comment does that observation accurate.
And if so what's the reason for that I'm, assuming three years of good price increases probably helps but if you could just comment on that thank you.
Yes, I can comment on your numbers, John and maybe we can sync up later.
Get on the same page, we would actually say the current accident year combined ratio was lower than that.
But the direction the trends Youre talking about is absolutely true.
The on the loss side. It is as you said three years of price increases in term of improvements.
And then there is don't forget the expense ratio of component over over the last few years.
Probably approaching three points off the expense ratio so yes.
The trend is absolutely correct I can't confirm your numbers and we've made the catch up later in the trial to get non assorted.
That's fine and then the trend is correct, which is which is fine.
Then.
I have to admit I'm struggling with ventures.
Page 35 of the disclosure on the game so.
Is the venture's EBITDA of 81 minus 22 and that has all sorts of come out of the revenue or I didn't understand the.
It's included in services and other expenses, yes, the gain would be at the EBITDA line. It would happen it would not be in the revenue line. It was just within the business that was underperforming we sold something and added $22 million gain on it.
Thank you.
So he might be confused but I hope you are at least the happy.
I'm happy with the results I am confused on some of the disclosure.
[laughter].
The results are better.
Yes.
Our next question comes from Mark Dwelle, with RBC capital markets.
Yes, good morning.
Several of my questions already been covered but on the.
On the Reserve addition.
It was the was that related to most of the reinsurance book with contingency related was it was it primarily related to the out the Reserve addition.
No it is related to business interruption.
Where I.
I would tell you the language there theres a lot of different language out there and theres going to be a lot of negotiation on what is actually covered and what is not.
But it would be instances, where seedings believe they have an element of coverage for business interruption through their property.
The reinsurance.
And as I've said.
At this point, it's mostly.
Notifications that we may have a loss that we're going to seek to you.
Very very few hard and fast.
Actual loss notifications.
So.
The great majority of the reserve as the IV NR and I do believe it's going to take quite a while for that all to be sorted out.
Was it a was it of U S season.
Non U S.
No.
I don't know Mark whether it's U S or international it's probably probably some above I'm sure it was more than one.
Just reviewing notifications that have come in.
Sure.
Okay fair enough.
The second question you mentioned and it was also mentioned true the first time in a little while in the 10-Q.
How about kind of the ramp up of of large pine.
I'll admit I kind of lost track of the thing I think you've been pushed the established back in 2019, and then maybe just an update of what's happening there and.
What youre, hoping to accomplish in 'twenty one with it.
Sure well in terms of the underwriting side of large part of that got off the ground immediately and had a great year in 2020.
So they were in the market rug business and.
From a retro standpoint of retro writers I think at a really good year in 2020, most of the losses were contained in the insurer with retained by the insurance companies or made it into reinsurance, but not to retro the.
The difficulty of Ben and I think we've talked about this just in terms of the ILS market in general.
Raising capital.
It has been.
With COVID-19 with recent per recent results and ILS. It has been a very long ramp up to raise the capital we feel like we are.
Within a whisker of raising that capital and sort of launching the fund side of things, but it has taken considerably longer than we ever would have guessed.
Okay. That's helpful.
And then the last question, mainly well actually two questions one related to the insurance business.
You know when you characterize the growth I mean, you talked about the rate increases. So I think you covered that.
Within the within the balance of the growth.
Is that more associated with exposure unit growth within your Insureds or is it more associated with kind of new business wins or gaming gaming policy count.
Yeah.
And I don't have details right in front of me.
Right now mark but it.
If anything we have been trying to shorten limits and a number of areas in the hardening market.
It just makes sense to try to get paid more for less exposure if possible.
I would say I believe most of the growth.
That is out there besides rate increases is going to be new policy count.
Because of <unk>.
As I said in a number of areas where possible.
We're asking underwriters to be very judicious with the amount of limit the are willing to put out.
Okay.
Helpful on that and then the last question maybe for Tom I mean, you you sounded.
Particularly for your own conservative self relatively bullish about <unk>.
Cal ventures.
For the upcoming year and I guess, the one question I wanted to maybe push back on just a little bit was is it seemed like as a group of businesses. They were relatively less pandemic affected in the first place during last year. So.
Is the growth simply just the recovery in those lines and those.
I was underlying businesses that were impacted or is it more broad general inflation of the economy.
Feel like you're capitalizing on yeah, no I think.
First off line.
I want to say last year and the pandemic effect this businesses for walked by the pandemic and set aside whatever.
Journal entries are accounting do you want the human dimension of what was involved in those businesses and the effects from the people that were running the vendors.
Never been anything like it and I'll remind you that it's over 15000 people mainly he worked in factories doing field service distributed all of it.
All around the country and those of the frontline workers. They never missed a day of work. They were they were in the factory in the field every single day and the scrambling the took place to just keep everything on the rails.
If you had to keep doing business in the in the way that you were doing it in many regards I mean for instance, one of the Ceos.
Of <unk> that makes the flooring in the back of the of the dry van trailer on the tractor contract you said, we can't make the wood floors from home.
The impact of that business was the immense and unprecedented.
Clearly at the instant where march 13th and the shutdown owners took place a lot of order books collapsed and you add shocks to the system.
And again I keep using the same two words amazed and grateful of how quickly both the the management teams responded and figured out how to conduct an operating business and how fast the order books came back and in fact started the top up in and go further so last year's results were very good I think they represent.
Sort of a phase shift and the change in the maturity and size and scale of Markel ventures is relative to the to the total company, but it's.
It's not something that.
That's sort of a new baseline and as you as we look in 2021 and 2022, we would expect the profitability that we saw last year to continue and to grow.
What gives me excitement is just to see that the quality of the people that are running those businesses, how well they've done at a time of the.
Great testing.
The results, they're putting on the board and how they're taking care of their customers and there are people of it's just exciting to be part of it is you pick up the right tone in terms of optimism and bullishness and this is no longer a lab experiments of big business the matters okay.
Okay I appreciate the additional color. Thanks, Thanks, a lot of that's all my questions.
Our next question comes from Josh Shanker with Deutsche Bank.
Yeah, Hi, this is Phil.
Phil Stefano.
Thanks for taking the question.
Can you hear me okay.
Yeah, Hey here, yes, we gotcha perfect just wanted to make sure that that was great.
So the.
Richard I appreciate the the show.
Show Me state reference.
And as we think about the evolution of the earn through of of price and business mix changes.
Is there an acceleration in the improvement of the underlying loss ratios as we look through this year or does the the conservatism kind of hold.
You talked about reinsurance first quarter was a bit quirky in the how that was reported but.
Just in thinking about the the.
The sequential changes in this as we look ahead.
Yeah.
Great question.
Trying to think about how to answer it.
<unk>.
I think it's fair to say.
Start with more likely redundant than deficient, we are going to try always to be more likely redundant than deficient.
And we are going to the slow to recognize good news fast to recognize bad news. That's what we've always tried to do in terms of.
Running our insurance businesses.
I do not believe just because of how we think I do not believe all of the rate increases that had been received in excess of.
Claims inflation I do not believe they are all baked into our combined ratio at this point I can't tell you I think it's 20% in there at 80%. The Com 50, 50, I don't know exactly.
And good markets things tend to get better than you expected in bad markets things to get worse than you expected I do I guess the think the best thing I can tell you is I do not believe we have baked in to our Attritional loss ratios at this point all of the rate we've been achieving.
Okay, No that's fair enough and I was just looking at reinsurance.
I would have assumed that pulling out the cat business would have been of headwinds for the attritional loss ratio.
Would benefit I mean, absolutely the volatility in the long run.
It feels like the commentary around the low sixties.
It makes the lift from pricing all of that more.
<unk> is the.
Am I thinking about this right that the cat business coming out would have been a headwind to the pricing has helped us helping to offset.
Yes.
Yeah.
I would tell you the first quarter is difficult to parse it really is.
Because of the well the current accident year loss ratio.
We still had earned premiums from cat in the first quarter.
That had <unk> in it.
The thing I can tell you. We can we can go away and try to kind of think through pulling apart. The numbers of the thing I can tell you is on.
On a go forward basis, we think the specialty casualty professional book should.
It should be somewhere in the <unk> and I won't I won't give a specific number but thats what were shooting for in terms of how we're pricing that business.
So the first quarter had some anomalies in the with the transfer of the business some of the business over to the fill.
Fill up.
The underwriting results of.
<unk>.
Large fine being in there and just Yuri the losses on <unk> being in there. So it is a little hard to pull apart hey, Phil It's Jeremy I'll, just maybe jump in there as well I think that's an important point of interest it's going to take a little while for the earnings talent to run offs, our earned premium in property lines with.
Somewhat comparable year over year and some of that is because we are purchasing less reinsurance so that benefits us as well. So when you take the actual cat experience out and you look at that Attritional loss ratio, it's very low on the property lines that still had earned premium that's going to fade away as we get into the year.
And importantly, as we approach the mid year, we really start coming off of risk and property as well. So we should have less expenditure and less volatility and youll start seeing the blended result in the reinsurance segment really being the combination of our casualty professional and specialty lines.
And that will blend to be as rich was commenting earlier slightly higher than what we see on an attritional basis in the first quarter.
Okay.
Switching gears to the sort of the venture business I guess, when I trying to tease out of the Lansing impact it feels like the the first quarter underlying revenue was still down high single digits and I think that's the pace that we saw in the.
The back half of 2020 as well.
Tom how economically sensitive.
Is this business to the go forward.
The rebound in the economy or is it do you feel like the these the underlying growth there is kind of hidden nature and we pivot as we look forward.
Well I think Directionally your numbers from the sensation of the.
The portfolio of prior to Lansing.
Top line revenue numbers are correct and I would describe a lot of that happened because of the shock that would've happened on March 13th when you shut the economy depth through 2020, all of the businesses recovered as Tom.
So it got better as the year went on to answer your second question, our cyclical or the there are a lot of cyclical businesses in there that are highly exposed to things like transportation freight volumes, new car sales things of that nature.
And I want to hearken back to look at the language that I put in the annual report where I put this five year buckets, because that's really how we think about things and look of what has happened. We've got they've got 15 years. So theres three five year buckets and if you look at.
The results from the the cash flows the EBITDA. The net income however, you want to categorize it or look at it and you look at it in this five year bucket terms, that's a very up into the to the to the right chart that were looking at secondly, I want to pick up of the point that Ritchie made in answer to some of the questions about the reported and what the pace.
The things being.
Apparently getting better or he said we are quick to recognize bad news and slow to recognize good news.
That's true for ventures as well.
We don't have a different philosophy are of different culture. When it comes from reporting the ventures results as opposed to the insurance results and one of the.
Points I was trying to make about the culture and the size and scale the large now.
In the early years of any deal, where you have purchase accounting and the amortization of goodwill and customer lists and all of those sorts of things proportionally. They would tend to be the heaviest at the beginning and diminish overtime now if we were interested in sort of managing the earnings per share we would work a little harder.
<unk> about trying to smooth that out and make it pain of pretty your picture picture on day, one we don't care about that we care about the cash returns and the earnings that the businesses of themselves produce and we want that to be sustainable over an indefinite long term period of time. So it's the only after a couple of years that they are part of the <unk>.
<unk> and part of the company that the accounting conservativism sort of sort of burns off and you start to be able to discern the true underlying economic performance of the business and so.
That is the reality is what is happening do you want to see hard physical the physical visual evidence of it look at the annual report letter and look at the five year buckets from <unk>.
So just one more and then I'll go back of the mine I guess.
In my mind on the insurance business one of the things that allows you to to be slow to recognize the good news of quick to recognize the bad news is the the cost of goods sold is much less transparent than in my mind. It is in the ventures business I guess what.
What flexibility do you have in the debentures reporting to a lot of enough flexibility, maybe thats not the good word, but what optionality do you have in the ventures reporting that allows you to have that mindset.
While not as much as I would like quite frankly so.
The purchase accounting rules, which change from time to time and these are GAAP under the auspices of <unk> b impose things and.
I do remind people that I was formerly trained as an accountant am of CPA non practicing.
I look at some of the accounting.
Rules shall the column and I try to think of them in with my financial hat on an economic add on of cash had on as opposed to GAAP hat on and as the accounts around here get tired of of my lectures on the sorts of things but.
It doesn't matter and I don't care, what we care about is the cash earnings of the business and the growth from the returns on capital and those are those are up into the right.
So we're slow it's painful.
In the current years in the <unk>.
Freshness of the deal because from.
The inside perspective, where I know the business and I think what's happening it's better than it looks and it just takes a period of time before it looks as good as it is and the size and scale absent of large deal we're starting to get to the point, where it's starting to look as good as it is now if we do a big deal we will start that.
All over again, but the denominator and the size and scale of the Mark of interest entirety right now means that the incremental effect of any new deal is probably a lot less than what it used to day and again I'd just keep getting back to that notion. If you really want to be able to draw hard lines and reconciled of them to GAAP accounting look at.
This five year charts.
Alright, maybe feels out there looking at him.
I think we've lost him.
We might be having some technical difficulties.
I'll ask around kind of.
Go ahead and conclude our question and answer session here.
I'd like to turn the call back over to Tom Gayner for any closing remarks.
Alright, perfect. Thank you so much for joining us we're happy to report the kind of news we were able to do we look forward to continuing to do so as time goes by and before <unk> seen.
At our annual meeting on May 10th in Richmond, Virginia, We will be live and in person and anybody who join US we'd love to see you. Thank you so much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.