Markel Group Inc (MKL) 2020 Q4 法說會逐字稿

Good morning and welcome to the Markel Corporation Fourth Quarter 2020 Conference Call. (Operator Instructions)

During the call today, we may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. They are based on current assumptions and opinions concerning 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 Statements in our most recent annual 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 the 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.markel.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, everyone. And thank you is the key and operative word to start off this message. The 18,000 employees of Markel turned in a wonderful performance in every dimension in 2020. And I just want to start off the call on behalf of Richie and Jeremy and everybody, thanking the associates of Markel for their work throughout 2020. It was not an easy year.

Markel's a holding company. And I think the thing that we hold most dear are our ideas and our values of taking care of our customers and our associates. We 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 those first 2 things, we produce good returns on capital, and we think that is the ultimate form of sustainability. All 3 engines of Markel fired in 2020 and provided positive thrust. But it might not have seen that way at various points of the year, especially early on in the early days of 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 -- we can get in the ring with Mike Tyson. We can take a punch in the mouth and keep on fighting. That's 2020 in a nutshell.

Markel is a resilience machine. Our 3 engines withstood the blows from the early days of 2020. And our 18,000-plus associates adapted and figured out how to recalibrate and accomplish our mission of taking care of our customers, our associates and our shareholders.

We're 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. Richie will then talk about our insurance operations. I'll hop back on to talk about investments and ventures. And then we'll 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 3 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 and 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 bottom line 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 and 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 was 83% in 2020, which is down 1 point from 84% a year ago. Earned premiums increased 11% to $5.6 billion in 2020, primarily due to higher written premium volume in our Insurance segment.

Our consolidated combined ratio for 2020 was a 98 compared to a 94 last year. For the fourth quarter of 2020, we reported an 89 combined ratio compared to a 93 a year ago. Our full year 2020 combined ratio included $360 million or 6 points of underwriting losses attributed to the COVID-19 and $169 million or 3 points attributed to natural catastrophes. This compares to $100 million or 2 points of catastrophe losses in 2019.

Excluding the impacts of COVID-19 and natural catastrophes, our combined ratio for 2020 improved due to a 3-point improvement in our attritional loss ratio and a 1-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 in 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 in 2019 and were primarily attributable to an increase in the fair value of equity securities which experienced significant market volatility during the year. The impact of significant declines in the fair value of 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 3 quarters of 2020. As I mentioned in previous calls, given our long-term focus, variability in the timing of investment gains and losses is to be 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. The decline is largely due to lower short-term interest rates as well as lower holdings and lower yields on fixed maturity securities in 2020. Net unrealized investment gains increased $353 million net of taxes during 2020, reflecting an increase in the 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 VSC Fire & Security, which closed during the fourth quarter of 2019.

Excluding the contributions of Lansing and VSC, 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 million a year ago, reflecting the contributions of Lansing and VSC as well as growth and improved operating results at certain of our businesses.

Looking 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 for 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 flows, 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 flows 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 increased earnings.

Invested assets of 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 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, and 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.

With that, I'll 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 2020 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 entered 2020, after recording $360 million of underwriting losses related to the COVID-19 pandemic, followed by natural catastrophe events in the third and fourth quarter adding an additional $169 million in underwriting losses, this is an amazing accomplishment.

We finished the year with a fourth quarter in which we recorded a combined ratio of 85% before the effects of COVID and natural catastrophe losses. We achieved strong growth and meaningful rate increases across most of our insurance and reinsurance product lines 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 efforts started to materialize.

We continue to seek out opportunities to grow 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'll 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 for 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 personal line products.

Importantly, virtually all of our growth was in our preferred product offerings as our top line growth was impacted in part by targeted reductions on products and accounts that weren't meeting our profitability goals. We believe our efforts around portfolio construction will continue to improve profitability levels over time.

The combined ratio for the Insurance segment in 2020 was 96 versus 93 last year. The 3-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 6 and 3 points, respectively. The impact from COVID and cat events were partially offset by a 3-point improvement in our attritional loss ratio arising 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 keep 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%. 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 line.

The combined ratio for the Reinsurance segment was 104 in both 2020 and 2019. The 2020 combined ratio was impacted by 7 points of underwriting losses from COVID-19 and 5 points from natural catastrophe events versus a 10-point impact from nat cat events in 2019. Excluding the losses from COVID and cat events, the 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 4 years, along with the impact from COVID-19 in 2020. While there are certainly opportunities in the current market to grow our top line in 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 the difference in our strategies in insurance versus reinsurance, over the past 3 years, our insurance gross written premiums have grown at a 13% compound average growth rate versus 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 are paid to assume as a reinsurer. We'll 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 2 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 in 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 CATCo, which continues to return investor capital as quickly as possible. Before considering amortization expense, the operating loss from our ILS operations in 2020 was wholly attributable to cost of CATCo, the majority of which are nonrecurring in nature.

For 2021, Nephila has received an excess of $1 billion of new subscriptions to date. This was driven by improving market conditions and in part by opportunities created with the transfer of our Markel Global Re property cat portfolio to Nephila. A portion of this capital was deployed at 1/1 and additional amounts will be deployed at major renewal dates over the course of the year. Nephila was also able to establish and are working on new investment vehicles. These include an ESG impact fund and a Lloyd's Syndicate multi-class fund.

That being said, Nephila was impacted by the elevated level of U.S. nat 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 increase to 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. Trends that we've discussed in past quarters continued in the fourth quarter and at the January 1 renewals. We see continuing price momentum in almost all lines.

Our insurance rate increases continue to average in low double digits and with double digits overall for the 2020 year. Reinsurance, which has lagged primary insurance pricing, closed the gap throughout the year but was 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 the 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 hardening market had nothing to do with the 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, have 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, Richie. I appreciate it. My comments will be extraordinarily brief this morning. Jeremy has given you the numbers, so I look forward to your questions.

In the Ventures area, as Jeremy reported, a record year: $2.8 billion of revenues, $367 million of EBITDA. And certainly, at different points in the year earlier on, the only 2 words that I can use to describe the performance by the Markel Ventures 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've produced record results. And as Jeremy alluded to, that's a record level of profitability even without the acquisitions of Lansing and VSC.

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 factors 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'll have the opportunity to have both teams on the field at various points during the year.

So we're very optimistic. We're very grateful for the results that the 18,000-plus employees of Markel produced over the years. I just wanted to thank everybody for the efforts in an extraordinary year that we did not have a playbook for as we entered into it, but we're pleased to report these results to you and we now look forward to taking your questions.

(Operator Instructions) The first question is from Phil Stefano of Deutsche Bank.

I was hoping you could talk about the decision to release -- understandably, it's a small portion, but release 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 impacts over the next couple of years. And of course, the industry always has this mantra of being quick to recognize the bad news and slow to recognize the good news.

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 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 influenced by the fact that we had elevated levels of nat 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. Rich, I don't know if you want to comment on that?

Yes. Yes, exactly. So it really was all about the aggregate cover and some of that benefit from the aggregate cover getting allocated to COVID, so gross reserves were unchanged. Totally agreeing with you in terms of the uncertainty around COVID reserves. I think in terms of the 2 areas where we have exposure, event cancellation, I think at that -- 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 insurers. And I think we feel reasonably comfortable about those reserves. But again, this is the first time any of us has seen the situation.

And then in the U.S., I know there's been a couple of verdicts that have probably been adverse -- you would say adverse to the insurance industry. But the reality is 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 of -- communicable disease exclusions.

So there's still volatility and potential risk out there. But we know -- we're 9 months later into it, 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 in clarification on the gross versus the net. And looking at the Reinsurance segment, I guess 2 questions within that. The first, was there any benefit from a profit accrual in the fourth quarter that helped the results?

And then, Rich, you framed thinking about the top line growth in Reinsurance in your opening remarks. And it feels like -- so as we get the cat-exposed business that comes out and goes through Nephila instead, I mean, it feels like this is going to be a clear headwind. Cat-exposed business aside, is flattish kind of the right way to think about growth for Reinsurance in the short run?

Yes. I think flattish is the right way to think about growth in the short run for Reinsurance. Obviously, we've transferred roughly $200 million of catastrophe business over to Nephila. So all things being equal, you would expect gross written premium to be down a bit this year in terms of our casualty, professional and specialty portfolios.

The one thing that is happening that can change that a bit is just price increases. We could 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'd 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 a profit, I don't -- I'm not real sure what you're talking about there. I'm sorry, Phil.

Yes. Was there a profit accrual that flowed 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, it felt like there was a slight uptick from what I would have expected.

Yes. Phil, the expense ratio, you're right. In the quarter, the expense ratio in Reinsurance was up. It is sort of personnel-related expenses. 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 than anything on the kind of the profit side.

Okay. And just one point of clarification. I think there was -- the 90% combined ratio target, was that for all of P&C or just insurance?

That's for all of P&C.

The next question is from Jeff Schmitt of William Blair.

Looking at growth in the Insurance segment, obviously, really great rate increases you had said are 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 you're lowering limits or increasing deductibles. Are those factors -- I mean is that a couple point drag for the year or is that maybe not as high?

Yes. There's no doubt that we 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 shortening our limits and -- as a way to manage the portfolio. And so you're getting a rate increase, but you might actually have less premium because of the shortening of the limits. We measure 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 we're up 13% in growth for the year. So there's a little bit more growth than there is rate increase. So there -- that suggests to me that net-net-net, there is some new business on top of just the rate increases that we're receiving. But there's no doubt there is some drag there.

And then in addition, we're always remixing the portfolio. And there was over $100 million of business that we exited during 2020 because it wasn't performing 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? What areas are you looking to kind of shift to?

Sure. We got out of a couple of programs that we're underperforming. One in particular, that was probably $70 million 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 we have gotten out of. And where we're really focused is professional liability, casualty, property, marine and energy, where we're growing nicely, and our rate increases are not just double digits, they're mid to high, 15 to 20 sorts of increases.

One other line would be the personal accident and contingency in the international space.

We got out of that as well, yes.

Got it. Okay. And then just one on the expense ratio in the insurance segment, running at 36%. It had been high 30s the past few years. I know you've mentioned just earned premium volume being up, but earned premium volume growth has been pretty good for a number of years. I guess, is 36% the right run rate to think about there?

Yes. We're really continuing to work on the expense ratio. So a great point that we've seen that come down. Our variable component of the ratio really is pretty unchanged. So most of the benefit you see year-over-year is us holding the direct and controllable expenses broadly flat, while sort of in insurance, growing net earned premium 13%.

We think that's a trend that we can continue to see as we grow. So we've been really focused on trying to hold our active controllable expenses flat and scaling up our operations that are sort of in place. So we've seen that really measured over a period of time. I mean you can go back for a number of years and really see the movement 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.

Your next question is from John Fox of Fenimore.

I have a number of questions. First of all, very good results. Richie, you mentioned event cancellation. I've been doing some reading. Of course, the Summer Olympics were, I guess, 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 exposure Markel might have?

We did have a portion of the exposure to the Olympics. We wrote a portion of that. 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 canceled 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 "wanting an acceptable return." What is that for reinsurance? And what type of capital base is that on with about $900 million of premium?

I think capital, I'd say it's about 1:1 in terms of the capital and we need the same 90%, need the same 90% combined on the reinsurance. I mean, actually, I'd like to see it be a little bit lower. I said 90% or better in 2021. And now let me just say, we're coming off some tough performance the 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 want to be damn sure it's ultimately going to prove out to a 90%. And so that's the goal.

And John, it's Jeremy. It should be a little bit more capital efficient, too. I mean that was part of the decision to sort of exit property and sort of focus on doing properties sort of through Nephila's offering. Obviously, net cat on the property reinsurance side is a much more capital-intensive product line.

Right, sure. No, it makes sense. And Rich, did you give an outlook for program services? You mentioned a couple of accounts that didn't renew, but then the fourth quarter was strong. Do you expect that to grow this year?

Yes, I do. I do. One of those accounts was one that they received -- that 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 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'll grow in '21.

Okay, great. And then just kind of a simple question, but clarification on ILS investment management. So you have $212 million of revenue and $231 million of expenses, so a loss. Does that $231 million, does that include the amortization of goodwill and intangibles?

No, the amortization would be separate.

Okay. And that's from your comp? Go ahead.

I was just going to say, but it does also include some pretty significant charges related to CATCo.

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. What I would say, I think Rich had commented on this earlier, is full year CATCo expenses were approximately $50 million, pretty significant amount. 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 stopped the repurchase plan back in March.

(Operator Instructions) The next question is from Mark Dwelle of RBC Capital Markets.

Just a couple that haven't already been addressed. Down in the product services and other segment, there was a $41 million charge related to the Latin America reinsurance segment. Is that a goodwill write-off or is that an underwriting loss? The description wasn't really clear what was happening there.

Yes. Mark, it's Jeremy. Let me try to clarify that. So going back, 2013, when we acquired Alterra, we inherited a small Latin America reinsurance operation. Really, over the course of the past 24 months, we've been winding down our Latin American operations. And this would be an example, as Richard was talking to before, not really a core product offering and not really sort of meeting profitability and return targets for us.

The last remaining 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 is a little bit of the accounting.

So you'll also see in the quarter a pretty large CTA gain in other comprehensive income. And the accounting would 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 the corresponding CTA gain because of that reclassification. The actual book loss is pretty small.

Okay. All right. So ultimately, it's primarily in accounting. Was there any material amount of premium associated with that? It 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 commented on a goal of 90% or better combined ratio, which my recollection is maybe the first time you've ever set such a goal publicly, so thank you for that. But more specifically, as you contemplate that targeting, would you perceive most of the improvement from here to be primarily loss ratio driven? Or do you think that there's any meaningful amount of expense ratio savings that can be further generated from here?

Well, both. Both. I think there's probably more on the loss ratio side at this point. I made a point of the 85% combined in the fourth quarter before cats and before COVID. We're hoping there's not another COVID-type loss in '21, and we have significantly reduced our cat exposure by the end of 2020. So I would expect our kind of normalized cat load to be less in '21.

So I feel like we're there in terms of a run rate to produce 90% or below. 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. That's very helpful. Last question. We haven't heard enough from Tom yet, so I'm going to ask you a Ventures question. I mean, obviously, this year was a difficult year in a number of senses for the multitude of business units in there. What are the key signposts you're looking for as far as reopening to kind of get the revenues, particularly in the units that saw revenue declines, to get those back running positively again this year?

Sure. Well, again, amazed and grateful are 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, the recovery that has already taken place is spectacular, and that's a tribute to the management teams that run those businesses and the workforces who just figured out, for instance, Havco, which makes the wood flooring for trucks. As the gentleman who runs that said, you can't make wood floors from home. So that workforce 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 the second half of the year.

The most economically sensitive section of the Ventures group would be things that are related to transportation in the various trailer businesses. And I can tell you, those businesses are already picking up. And the fourth quarter was pretty nice, and 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 general economic conditions. It'd be like thanking the weatherman for a sunny day. But as the weatherman, I would predict that the conditions are getting better.

The next question is from Mark Hughes of Truist.

I wonder if you could talk about kind of frequency and severities you saw develop through the year? Anything related to COVID and the shutdown? And then maybe social inflation, you mentioned that as the continuing driver for rate momentum. Do you think there's some pent-up demand as maybe courts open in 2021?

We think frequency is about the same. In terms of severity, that's really where you see the social inflation showing up, the nuclear verdicts, the 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 are 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 that margin that we've been generating have been needed. So I think frequency, we're seeing about the same severity as where we're seeing it go up.

On the cat exposure, you pointed out how the normalized cat load is less than '21. Any other metrics you can share sort of specifics on, say, premiums related to cat exposure or maximum loss numbers? Just to give us a better sense of that change.

Probably the best thing I 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, we've got a bit about 3 points for 2019, and it's probably less than 2 -- excuse me, for 2020, and it's probably less than 2 points for '21.

Yes. And for example, in our Global Re division, that property book, I think, ended up writing gross, maybe $220 million is certainly less net. I think that's in the press release. But that would be a good example that the vast 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 35%. And for Reinsurance, I think it was about 36%.

And the next question is a follow-up from Phil Stefano of Deutsche Bank.

Yes. A quick one on the 90% combined guidance. I got the impression in a response to an earlier question, 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 reserving base that's set on that. I mean, how should we think about this 90% as a reported versus a fully developed number?

90^%, I'm thinking in terms of the 90% as reported. So if we have a margin of -- 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% in Reinsurance in 2021. And I'm hoping for something less than a 90% in Insurance in 2021.

Got it. Understood. And with the ILS commentary in AUM update, I didn't hear Lodgepine mentioned in there. I was hoping you can give a quick update on that.

Lodgepine, in terms of results, Lodgepine had a terrific year in 2020. We talked a lot about small to medium-sized events. 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 fall in 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 a year's track record, I know a year isn't a lot, but it is a year's 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 4/1.

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. 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.