Markel Group Second Quarter 2024 Earnings Call Transcript

TRANSCRIPT

08-01-2024

Markel Group (Q2 2024 Earnings)

Markel Group Second Quarter 2024 Earnings Call

TOTAL PAGES: 27

Markel Group (Q2 2024 Earnings)

Markel Group Second Quarter 2024 Earnings Call

CORPORATE SPEAKERS:

Thomas Gayner

Markel Group; Chief Executive Officer

Brian Costanzo

Markel Group; Chief Financial Officer

Jeremy Noble

Markel Group; President of Insurance Operations

CORPORATE SPEAKERS:

Andrew Kligerman

TD Securities; Analyst

Andrew Andersen

Jefferies; Analyst

John Fox

Fenimore; Analyst

Charles Lederer

Citigroup; Analyst

Markel Group (Q2 2024 Earnings)

Markel Group Second Quarter 2024 Earnings Call

PRESENTATION:

Operator^ Good morning. And welcome to The Markel Group Second Quarter 2024 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 in the press release for our second quarter 2024 results, as well as our most recent annual report on Form 10-K and quarterly report on Form 10-Q including under the captions, safe harbor and cautionary statements and risk factors.

We may also discuss certain non-GAAP financial measures during the call today. You may find the most directly comparable GAAP measures and a reconciliation to GAAP for these measures in the press release for our second quarter 2024 results or our most recent Form 10-Q.

The press release for our second quarter 2024 results as well as our Form 10-K and Form 10-Q can be found on our website at www.mklgroup.com in the Investor Relations section.

Please note, this event is being recorded.

I would now like to tuthe conference over to Tom Gayner, Chief Executive Officer.

Please go ahead.

Thomas Gayner^ Thank you. And good morning.

Welcome to The Markel Group, second quarter conference call.

My name is Tom Gayner. And I serve as your CEO.

Markel Group (Q2 2024 Earnings)

Markel Group Second Quarter 2024 Earnings Call

I'm joined today by our CFO, Brian Costanzo, and the President of our Insurance Operations, Jeremy Noble.

I'll make a few opening remarks and then tuthings over to Brian and Jeremy to update you on our financial results and some comments on our Insurance engine.

Then we will open the floor for questions.

We always appreciate the chance to spend time with our partners.

We cannot build the Markel Group without long-term owners who share our goals.

As such, we welcome your long-term questions, thoughts and comments as fellow owners of the business.

First off, we've got some good results to share with you. Brian will follow the conventions of financial reporting and share our most recent quarterly and year-to-date financial results.

I will speak to some longer-term numbers. Those results will show positive contributions from each of our three engines.

Our insurance engine continued to grow in the first half of 2024. Underwriting profitability improved sequentially from the first quarter.

Our ongoing accounting conservatism and integrity can also be seen by ongoing favorable reserve development.

We continue to produce improved underwriting results so far in 2024 despite ongoing industry- wide pressures of inflation and loss costs across almost every class of business.

I am proud of our insurance teammates and their ongoing dedication to continuing to improve our underwriting performance.

In our Ventures operations, we set new records in sales and earnings.

I think it's accurate to say that we achieved these results against a backdrop of increasingly competitive and challenging external positions.

I would also describe the overall economic environment, as returning to some sense of normality after the last few years of disrupted overall conditions, supply chain challenges

Markel Group (Q2 2024 Earnings)

Markel Group Second Quarter 2024 Earnings Call

emerging and being dealt with, dramatic interest rate movements in both directions and other volatility creating surprises of [HEP] snapping speed in force.

Markel Ventures continues to perform very well amidst these conditions, and I couldn't be prouder of the team's efforts and their results.

One other point on Ventures is that for the last several years, we've been talking about how high transaction prices were in the buying and selling the businesses.

As such, we acted with discipline and did not add any new companies to our family in 2022 or 2023.

I'm pleased to report that so far in 2024, our partners at VSC and Costa Farms have acquired businesses that complement their existing offerings and footprint.

We also added a new Markel Ventures company at the end of the second quarter with the purchase of a majority interest in Valor Environmental.

Valor is a leading provider of erosion control, storm water management and regulatory-driven site services, and we are delighted to welcome them to the family. Dollar in each of the VSC and Costa transactions met our long-standing4-part tasks we use to guide us in selecting investments both public and private.

Those four parts are: one, we look for businesses with good returns on capital that don't use too much debt.

Second, we look for management teams with equal measures of talent and integrity; Third, we look for businesses with reinvestment opportunities and capital discipline, and four, we look for all of those first three lovely attributes at a fair price.

As to Valor and the additions of Costa and VSE, check-check-check and check.

It's worth noting that beyond being an attractive buyer and home to sellers of long-term, multi- generation family businesses and their owners.

At certain times, we can be an attractive buyer for financial backers such as family offices and private equity firms.

Until recently, we did not consummate any deals for those types of sellers. Higher interest rates and changing business conditions are starting to shake a few things loose from some different trees these days.

Markel Group (Q2 2024 Earnings)

Markel Group Second Quarter 2024 Earnings Call

We are productively engaged in way more conversations with way more kinds of sellers in this environment than it has been in the case in recent years.

Stay tuned for more news as time goes by.

I am personally excited by what we're seeing and what we're working on these days.

Our ability to productively deploy capital at good rates of retuand durable businesses that meet our four-part test is exciting to me. The skills and relationships required to invest capital wisely don't spring up overnight.

We've been honing these skills for decades, and the opportunities to act on them are now growing.

On the investment side, we continue to consistently follow our time-tested strategy.

The recurring interest and dividend income continues to increase as each maturing bond in our portfolio is replaced with a higher coupon security.

Similarly, dividend income from our high-quality portfolio of equities continues to increase.

While our relative equity returns this year trails the S&P 500, we remain committed to our long- term disciplined approach. The last time we trailed the S&P by this magnitude was in the late 1990s when the market seemed possessed by a singular market focus.

We stuck to our guns and preserved and protected our balance sheet. That turned out to be a good thing, when the market environment changed.

It seems to me like we might be facing a similar phase change environment today as we did at that time.

We have been and will remain committed to our successful time-testedlow-cost and tax- efficient strategy.

Finally, before I tuthe call over to Brian to review the 2024 results, I want to provide some thoughts on a longer-term horizon measurement of our progress at the Markel Group.

As we've stated repeatedly over the years, we aspire to build one of the world's great companies, and we mean to do so in an enduring fashion.

Markel Group (Q2 2024 Earnings)

Markel Group Second Quarter 2024 Earnings Call

As one tool to foster long-term behavior, internally, we measure our performance over 5-year intervals to judge our performance and calculate incentive compensation.

We do so in an effort to constantly remain focused on longer-term accomplishments rather than quarterly or annual measures.

Five years ago, at June 30, 2019, we had total net investments, that is our entire investment portfolio plus cash minus debt of $17.5 billion.

As of June 30, 2024, that number stands at $28.2 billion, an increase of 61%. five years ago through June 30, 2019, we earned underwriting and insurance income of $142 million.

Five years later, through June 30, 2024, we earned underwriting and insurance income of $313 million, an increase of 120%. five years ago through June 30, 2019, we earned $133 million of operating income in our Markel Ventures operations.

Through June 30, 2024, we earned $281 million of operating income, an increase of 112%.

At June 30, 2019, each share of Markel sold for about $1,100.

At June 30, 2024, each share of Markel sold for about $1,575, an increase of about 43%. The share price change is the lowest number on the page.

In response to our own calculation of the intrinsic value per share of Markel, and the array of opportunities available to us to productively deploy capital, we've repurchased Markel shares. five years ago, the share count stood at 13.826 million shares.

At June 30, 2024, it stood at 12.962 million, a decrease of almost 1 million shares. The vast majority of these repurchases took place in the 2022 through 2024 timeframe.

It seems to me that the math indicates we're looking at the circumstance of more company divided by fewer shares.

I think that this ought to produce excellent returns for our shareholders over time. Even more important than the numbers, is the way the numbers get achieved. The numbers are the outcome and the results of our culture and the efforts of the people of this company.

As we say in the first paragraph of our culture statement, the Markel Style, we believe in hard work and zealous pursuit of excellence while keeping a sense of humor.

Our creed is honesty and fairness in all of our dealings.

Markel Group (Q2 2024 Earnings)

Markel Group Second Quarter 2024 Earnings Call

I am proud of the people of Markel and I thank them for their ongoing efforts to build our company around such wonderful principles.

With that, I'd like to tuthings over to Brian.

But wait, before I do, I just want to interject here, my [frac] and able and wonderful assistance Cynthia Featherman actually deployed the tools of AI to take my comments and ask Microsoft copilot to write a poem about what I just said. This will only take a second, but I can't help but share it with you. So you're good.

We're glad to share some news with you about our quarter two review.

We have three engines that fuel our Fire, Insurance, Ventures and Investments they inspire.

Our Insurance engine showed its skill in underwriting despite some mills.

Our Ventures engine soared to new heights in sales and earnings and new buys.

Our Investment engine stuck to our plan of low-cost,tax-efficient and brand.

We track our progress over five years, and we see more value and less fears.

We also bought back some of our stock to show you that we value your lock.

We thank you for your trust in backing, and we hope you'll join our unpacking.

So with that AI augmented presentation, let me tuit over to you, Brian.

Brian Costanzo^ Thanks, Tom.

It'd be hard to top that. Maybe we can make Dr. (inaudible) out of that poem there. Excited to be here this morning to discuss our results for the first half of 2024.

Each of our three engines, Insurance, Investments and Markel Ventures made significant contributions to our first half results.

Starting off with the consolidated results.

Total revenues increased 5% to $8.2 billion for the first half of 2024, and total operating income increased slightly year-over-year to $1.75 billion with the largest driver of growth being a 34%

Markel Group (Q2 2024 Earnings)

Markel Group Second Quarter 2024 Earnings Call

increase in our net investment income. Net income to common shareholders was $1.3 billion in the first half of 2024 compared to $1.2 billion in the same period of 2023. The comprehensive income to shareholders in the first half of both 2024 and 2023 was $1.2 billion. Net cash provided by operating activities was $1.2 billion in the first half of 2024 compared to $1 billion in the same period of 2023.

Operating cash flows in 2024 reflected strong cash flows from each of our operating engines with the most significant contribution coming from our Insurance engine.

In May, we issued $600 million of 30-year 6% unsecured Senior Notes, bringing our debt-to- capital ratio to 22%.

In the first half of 2024, we repurchased $260 million of Markel Group common stock under our outstanding share repurchase program compared to $187 million in the same period of last year. Turning now to the performance of our three operating engines and starting with our Insurance engine. Gross written premiums within our underwriting operations grew by 6% to $5.7 billion for the first half of 2024 compared to $5.4 billion in the same period of 2023.

Our increased premium volume was driven by our International Marine & Energy Insurance and Reinsurance business and growth on select U.S. lines of business including personal lines and programs. This was partially offset by targeted premium contraction in select classes within our U.S. professional liability and general liability portfolios where we took underwriting actions to improve profitability.

Jeremy will discuss these actions in more detail within his commentary.

Our consolidated combined ratio for the first half of 2024 was 94% compared to 93% in the same period of 2023. The one point increase was due to higher attritional loss ratios on our professional liability and general liability insurance product lines as we remain prudent in adding margin to classes with challenging loss trends.

Also we recognized losses on our discontinued intellectual property collateral protection insurance product.

On year-to-date 2024 consolidated combined ratio, we included $96.8 million or two points of losses on our CPI product line.

Prior year loss reserves development improved over the first half of 2024 to $221 million in loss takedowns versus $139 million in 2023.

Markel Group (Q2 2024 Earnings)

Markel Group Second Quarter 2024 Earnings Call

Favorable development in the first half of 2024 was most notable within our International Professional Liability product lines.

We remain cautious in our approach to reducing prior year loss reserves on our longer-tail U.S. Professional Liability and General Liability lines given recent claim trends.

Within our Program Services and ILS operations, operating income increased 23% to $61 million primarily driven by strong growth and performance in our fronting businesses. Moving next to our investment results.

We reported net investment income of $441 million in the first half of 2024 compared to $329 million in the same period last year. Net investment income reflects the recurring interest and dividends earned on our investment portfolio.

We continue to benefit from higher interest rates as the yield on our fixed maturity portfolio, short-term investments and cash equivalents all increased compared to the first half of 2023.

We expect, based on the current interest rate environment, that the yield on fixed maturity securities will continue to increase slightly throughout 2024 as lower-yielding securities mature and are replaced by higher-yielding securities.

At June 30, 2024, the book yield on our fixed maturity portfolio was 3.4%, up from just over 3% at the end of last year. Net investment gains [of $772 million] in 2024 reflect favorable market movements, resulting in a retuof 8.9% on our public equity portfolio for the first six months of 2024. This compares to net investment gains of $857 million for the first half of 2023.

As you've heard us say many times before, we focus on long-term investment performance, expecting variability in the equity markets from period to period.

At the end of June, the fair value of our equity portfolio included cumulative pretax unrealized gains of $6.9 billion.

Net unrealized investment losses included in other comprehensive loss in the first half of 2024, or $152 million net of taxes compared to net unrealized investment gains of $30 million net of taxes in the same period of 2023.

Recall that we typically hold our fixed maturity investments until they mature and would generally expect unrealized holding gains and losses attributed to the change in interest rates to reverse in future periods as bonds mature.