MARKEL-GROUP Earningcall Transcript Of Q2 of 2024
Thomas Sinnickson Gayner -- Chief Executive Officer 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. 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 turn things 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 industrywide 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 emerging and being dealt with, dramatic interest rate movements in both directions and other volatility creating surprises of head snapping speed in force. Markel Ventures continues to perform very well amid 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. Valor in each of the VSC and Costa transactions met our long-standing four-part test 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. 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 return and 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-tested low-cost and tax-efficient strategy. Finally, before I turn the 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. As one tool to foster long-term behavior, internally, we measure our performance over five-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 time frame. 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. 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 turn things over to Brian. But wait, before I do, I just want to interject here, my frac and able and wonderful assistant, Cynthia Fedderman, 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 here it goes. 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 log. We thank you for your trust in backing, and we hope you'll join our unpacking. So with that AI augmented presentation, let me turn it over to you, Brian. Brian Costanzo -- Chief Financial Officer Thanks, Tom. It can be hard to top that. Maybe we can make Dr. Seuss book 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% 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 and 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. 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 return of 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 pre-tax 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. We continue our long-standing precedent of investing in the highest quality of fixed income securities. As of June 30, 2024, 98% of our fixed maturity portfolio was rated AA or better and there are no current or expected credit losses within the portfolio. Finally, I'll cover the results from our Markel Ventures engine. Revenues from Markel Ventures increased 4% in the first half of 2024 versus the same period of 2023, reflecting moderate revenue increases at many of our products businesses as well as contributions from an acquisition made by one of our businesses in the first quarter of 2024. Markel Ventures operating income increased 7%, driven by higher revenues and improved operating margins at our consumer and building products businesses. As Tom mentioned, we also completed the acquisition of Valor Environmental late in the second quarter, adding to our family of businesses within Markel Ventures. Inclusion of operating results from Valor will begin in the third quarter. For our June financials, the preliminary allocation of purchase price includes $108 million to goodwill and $49 million to intangible assets. With that, I will turn it over to Jeremy to talk more about our insurance engine. Jeremy A. Noble -- President, Insurance Thanks, Brian, and good morning, everyone. I'm pleased to be here with you to discuss our progress within the insurance engine over the first half of this year. Our insurance results continued to improve this year, coming off elevated combined ratio results during the latter half of 2023 due to prior year's reserve strengthening. Our combined ratio for the second quarter improved sequentially and our first half combined ratio is where we expected to be at this point in the year despite higher losses within our intellectual property collateral protection portfolio which is in runoff. As Brian shared, we experienced greater favorable development on prior year's reserves through six months of 2024 than a year ago, and have not seen meaningful further development in the products we addressed at year-end. Overall, our operating revenue growth and underwriting gross written premium growth in the first half of the year reflects the actions we have taken to improve profitability. Within our insurance segment, the lines where I have previously discussed us taking significant underwriting action to improve profitability, namely our brokerage excess and umbrella and brokerage contractors books within general liability, and our risk-managed professional liability classes, we decreased writings year-to-date by over 20%. The remainder of our products in our insurance segment, where we are generally achieving good levels of profitability and are satisfied with rate adequacy have grown 8% in the aggregate. Now let me briefly take you through each of our divisions for the first half of the year. First off, within our specialty division, we continue to benefit from the corrective actions taken within select classes in our casualty and professional liability books, while will also remain cautious on our current accident year loss picks in these areas. This is most evident in the gross written premium reductions in select classes of our casualty and professional books. I mentioned earlier. But specifically, we continue to pursue growth and profitable product classes, including personal lines, property, inland marine, binding and small commercial, managed reliability, and select programs business. Many of these lines are achieving meaningful rate increases. An exception is property, where in the past few months, we have seen a contraction in rates back to low single digits but still at attractive pricing levels. The growth in these lines is improving the product mix and overall combined ratio of the division as our premium earnings mix changes. Within our casualty and professional liability classes, we continue to execute on our corrective underwriting action plans within certain pockets of the portfolio, where results have not met our expectations. During the first half of the year, our recently discontinued intellectual property collateral protection product line negatively impacted our combined ratio performance due to an increase in the frequency of defaults on loans collateralized by intellectual property that became impaired. During the second quarter, we recognized additional claims expense of $56 million relating to this discontinued product line, which adversely impacted our loss ratio by three points. Through the first half of 2024, we have recognized $97 million in claims activity which increased our loss ratio by two points. Given the claims made nature of this product, most of these losses impact our current accident year attritional loss ratio. We recognized claims expense at the time claims are considered probable which occurs when there is both a default on the loan and an impairment on the intellectual property collateralizing the loan. That said, loan defaults are trending both at a faster clip and at a meaningfully higher level than anticipated at the beginning of the year. Changes in the macroeconomic conditions have put strain on early stage businesses, resulting in less access to capital and higher loan defaults. Valuations of the intangible assets, collateralized to loans also have not held up in the workout process. We expect the majority of loss activity on this product to resolve by the end of 2025. The impact in any future quarter is unlikely to be significantly more than what has been experienced in each of the past two quarters. For context, our portfolio consists of approximately 30 individual loan transactions for which we have recorded claims expense of just under half of the loans. Overall, our specialty division under its recently refreshed management team led by Alex Martin, has done a tremendous job of quickly executing on our corrective actions and improving profitability, while attending to the needs of our trading partners and insurance. We are now very focused on our product capabilities where we can add value and feel we can grow. I applaud our collective specialty team for their resiliency, tenacity and commitment. Our international division continues to produce fantastic results, achieving both significant premium growth of just over 8% and a sub-80 combined ratio for the first half of this year. We continue to push for growth both organically and through geographic expansion as well as broadening our product offerings across our existing operations. While we have seen an increase in competition and downward pressure on rates within some classes in our international book, specifically our professional liability, energy, and cyber portfolios, we believe these lines are still priced at levels that meet our requirements from a rate adequacy standpoint. Our State National program services operations achieved significant premium growth of 22% for the first half, while producing consistent levels of high profitability. We also continue to differentiate ourselves within the fronting market with our ability to facilitate and place complex transactions. Our team continues to be best-in-class and efficiently matching risk with capital, managing our exposures. Within our Nephila operations, the team has been hard at work constructing attractive portfolios and responding to heightened levels of natural catastrophe losses anticipated this year. We have both hedged risk for current capacity deployed and reduced overall premium writings, which will modestly lower our operating revenues in the short term. However, these actions are in the long-term best interest of our investors, and we remain excited about the future prospects of our business. In our global reinsurance division, we remain steadfastly focused on pricing adequacy for the lines we are deploying. In the current market environment, we've lowered our required combined ratio pricing targets to reflect caution, while also being opportunistic in pockets of the book, and particularly within our marine and energy class. In general, we are walking away from deals where we believe pricing is inadequate. With that, I'd like to thank our over 5,000 associates across our Insurance operations, for their exemplary efforts for the first half of the year, delivering improving results and serving our clients. Now I'll turn it back over to Tom. Thomas Sinnickson Gayner -- Chief Executive Officer Thank you, Jeremy, and Brian. As with that, we will open the floor for questions, if we may. Operator Questions & Answers: |
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