Q3 2022 Markel Corp Earnings Call
Good morning, and welcome to the Markel Corporation third quarter 2022 conference call all participants will be in a listen only mode.
Should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw your question Press Star one again.
During the call today, we may make forward looking statements within the meaning of the private Securities Litigation Reform Act up 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 our most recent annual report on Form 10-K, and quarterly report on Form 10-Q.
Including under the caption risk factors and safe Harbor and cautionary statement.
They 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 our most recent Form 10-Q.
Our Form 10-K and Form 10-Q can be found on our website at www Dot Markel Dot com and the for investors 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 Regina Good morning, Let me add my welcome Markel Corporation third quarter Conference call. This is Tom Gayner, and it's my pleasure to welcome you to our quarterly call I'm joined this morning by my co CEO , Richie Whitt and our CFO Jeremy Noble.
He will update you on our overall financial results.
Sure its operations in just a minute.
Before we begin and as they.
The news business.
Swallow the headline.
Well, here's the headlines things are going very well at Markel I am delighted to share these results with you.
Scott.
Now recognize that when you look at the headline numbers that may not be your immediate reaction.
So please let me share a few points of view that might help you enjoy the same sense of progress and optimism.
First our insurance operations are solidly profitable and growing at the same time.
Richie and Jeremy will give you more numbers or details on this.
But from my point of view are these sorts of underwriting profits and to be growing and to continue to report favorable reserve development in the face of ongoing large scale natural catastrophes, such as Ian and ongoing inflationary pressures, whether CPI flavor or social flavor.
It's fantastic.
So proud of them.
Grateful for our insurance operations and the results they are posting.
<unk> had some bumps along the way pieces and parts of our insurance operations in the last few years, but I think these results validate the hard work the hard decisions the discipline and the dedication of the people of our insurance operations.
I think these results bode well for the future.
Second our reinsurance operations.
Posted solid profitability in the face of all of the challenging factors I just noted.
Ongoing high levels of property catastrophe losses for the industry would normally Harley to tough results in our reinsurance business we.
We spoken for the last several years about what we've done to improve our reinsurance results.
Hope these numbers provide you with some assurance that we're on the right track.
More importantly, I think these reinsurance results speak to something very important about our culture.
There's no question that reinsurance results were far from optimal in recent years as is always the case around every aspect of markel.
We did our best to figure out what was wrong.
We needed to improve and then we went about the work the hard work of making things better.
As always the case.
Didn't deny there was a problem and we didn't run away from it. We just went to work every day and concentrated on making it better.
Internally, the things have been better and our reinsurance operations for a while now.
With the time lag involved in insurance accounting it takes a while for those results to be visible in our financial reporting.
Additionally.
And what should emphasize the improvement consider the asset test at the modest impact on our results.
<unk> lock homes terms, Ian was the dog that didn't bite.
I hope that you can now share our confidence that we're on the right track in reinsurance and then it will be a valuable contributor to our overall results going forward.
Markel ventures continues to set new records in revenues and profitability.
Mark how ventures provides doses of resiliency optionality culture and cash to the Markel Corporation.
The people of ventures continue to operate in challenging environments of supply chain challenges tough labor markets inflationary pressures and increasing regulatory burdens. Despite this ongoing challenges. The venture teams continue to set new records I can't thank them enough for their ongoing.
Relenting commitment to excellence.
Our state National and the filler operations continue to make progress.
The performance of state National continues.
Continues to go from strength to strength.
There are also two important items of note in the solar that I hope encouraging one.
We've received proceeds of over $300 million from the sales of the two MGA operations, where part of Mozilla.
Secondly, as we roll through another difficult year of industry catastrophe losses.
Performance of the Philip funds demonstrates the underwriting process is creating investment results that track expectations the impact of storms like Ian and other industry losses are developing along the lines expected by our modeling and loss expectation methodology and that bodes well for the <unk>.
Sure.
For investments.
What.
On the surface, the well known declines of both equity and bond markets are penalizing current reported returns that's true, but what does that mean.
The answer is it depends.
If markets were going down and we had to sell our investments at the same time that would be awesome.
Markets were going down and we just stood pad that would probably be okay, but not wonderful.
If markets were going down and we were steadily buying more equity securities and bonds with higher interest income and our own stock at lower prices that would be fantastic.
I'm delighted to report to you that our circumstances today are exactly that whereby that adds to the overall, earning power of markel over time.
Fifth so far this year, we've repaid $350 million of senior long term debt.
We purchased $208 million Mark I'll start that amount almost doubles, what we repurchased in the first nine months of last year.
Our recurring recurring net investment income of the interest income and dividends you received continued to grow during the quarter that line item grew 18% from $91 million to a $108 million I think we can reasonably expect to see ongoing increases in recurring recurring investment income for the foreseeable.
Future.
To summarize before I turn the call over to Jeremy.
Our hand.
You as our shareholders out of profitable insurance operation that is growing.
We're investing these profits profits at positive long term rates of return and additional insurance opportunities publicly traded securities ventures operations and our own shares you're hungry for good returns from your investment and so are we.
You can picture Markel as a pizza.
As of the overall pizza is growing and we're cutting it into fewer slices seems to me like the value of each slices growing.
Guessing the market will see it that way in the fullness of time with that we will shift away from the top of Pizza and I will turn now to Jeremy Brad provide more color and details of the financial results Chairman.
Thank you Tom and good morning, everyone.
We often talk of win win wins and of the importance of being an organization for which others are better off for being associated with its events like Ian that remind us of this virtue and where we must follow through I am incredibly proud of our associates, who are tirelessly supporting our customers and the local communities that have been impacted.
Whether we look to our settling claims to get people back on their feet for the supply of building materials to help restore markel is actively working to improve the situation and our thoughts continue to be with people, Florida at this time.
We remain pleased with the strong performance of our insurance and Markel ventures operations, we are confident in the quality and durability of our investment portfolio as we as well as our ability to execute against our operating plans within our insurance and ventures businesses, we continue to find opportunities to allocate capital across our three engines and we remained.
Based on building long term shareholder value overall, it's been a pretty solid first three quarters of the year.
Looking first at our underwriting results gross written premiums surpassed $7 5 billion for the first nine months of 2022 compared to $6 3 billion and.
In 2021, an increase of 19% or increased premium volume reflects new business volume strong policy retention levels more favorable rates and expanded product offerings, our professional liability and general liability product lines continued to lead the way, but we also achieved meaningful growth across many of our other product lines.
Our consolidated combined ratio was 91 for the first nine months of both 2022 and 2021.
Our 2022 combined ratio includes $70 million.
Net losses attributed to hurricane Ian and $35 million attributed to the Russia, Ukraine conflict.
Which combined added two points to the year to date combined ratio.
All losses attributed to the Russia, Ukraine conflict were recognized in the first quarter in our initial estimates associated with this event remain unchanged.
In 2021, we incurred $182 million or $4 net losses from natural catastrophes in the first nine months.
Excluding these loss impacts from both years, our consolidated combined ratio for the first nine months of the year was <unk> 89, compared to <unk> 87 for the same period in 'twenty one.
The increase reflects the impact of less favorable development on prior accident year loss reserves this year compared to last year, partially offset by a lower expense ratio.
With regards to prior year loss reserve development prior year loss reserves developed favorably by $204 million in the first nine months of this year compared to $366 million in the first nine months of last year.
In 2022, among the reasons, we experienced lower favorable development was due to greater than anticipated claim settlements and increased claims frequency and severity trends in certain of our professional liability product lines within our insurance segment.
The impacts of economic and social inflation have created more uncertainty around the ultimate losses that will be incurred to settle claims, particularly on our longer tail product lines, such as professional liability and general liability.
As a result, we are approaching reductions in prior year loss reserves cautiously, particularly on more recent accident years as I've stated last quarter and consistent with our reserving philosophy. We have responded quickly to increase loss reserves. Following any indication of increased claims frequency or severity in excess of our previous expectations.
Incentives were claims trends are more favorable than we previously anticipated, we're often waiting to reduce our loss reserves more evaluate our experience over additional periods of time.
Turning to our investment results net investment losses included in net income were $2 $2 billion in the first nine months of the year and were primarily attributable to a decrease in the fair value of our equity portfolio driven by significant declines in the public equity markets. During the period. This compares to net investment gains of $1 $2 billion for the first nine months of last year.
Attributable to an increase in the fair value of our equity portfolio driven by favorable market value movements.
As you've heard US say many times before we focus on long term investment performance, we continue to maintain our investing discipline understanding the periodic cause in the equity markets are to be expected and will result in the variability and timing of investment gains and losses.
We will continue to measure investment returns over longer periods of time at the end of September the fair value of our equity portfolio included cumulative unrealized holding gains of $3 9 billion.
With regards to net investment income, we reported $274 million in the first nine months of this year compared to $284 million from the same period last year. The decrease reflects the impact of losses recognized on equity method investments this year compared to income from equity method investments last year net investment income on our fixed maturity securities. This year was up.
Slightly compared to last year, the impact of higher average holdings in fixed maturity securities in the current year was mostly offset by lower yield compared to the same period a year ago were beginning to see the benefit of higher interest rates on our net investment income through recent purchases of higher yielding fixed maturity securities.
That impact will become more meaningful in future periods as lower yielding securities mature and continue to be replaced with higher yielding securities beginning in the second quarter. This year. The book yield on new purchases began to exceed the average book yield of our portfolio.
Net unrealized investment gains decreased $1 3 billion net of taxes. During the first nine months of this year, reflecting a decline in the fair value of our fixed maturity portfolio, resulting from increases in interest rates. As a reminder, we typically hold our fixed maturities until immature would generally expect these unrealized losses to reverse in future periods as Basel sure.
Our portfolio has an average rating of AAA and there are no current or expected credit losses in the portfolio.
Now I'll cover the results of our Markel ventures segment.
Revenues from Markel ventures increased 31% to $3 5 billion for the first nine months of 2022 compared to $2 $7 million for the same period last year. This increase reflects the contribution of revenues from our December 2021 acquisition of Metro month in August 2021 acquisition of partner as well as organic growth across many of our other businesses must know.
At our construction services businesses.
EBITDA from Markel ventures were $353 million for the first nine months of this year compared to $304 million. During the same period last year. The increase reflects higher revenues and improved operating results across several businesses as well as the contribution of Metro model.
Looking at our consolidated results for the first nine months of this year our year to date results demonstrate how well our core operations are navigating the current economic environment and executing at a high level.
We reported a net loss to common shareholders of $922 million for the first nine months of this year compared to net income to common shareholders of one $5 billion for the same period a year ago. This was largely attributed to the year over year swing in changes in our public equity portfolio evaluation.
Prehensile loss to shareholders for the first nine months was $2 2 billion.
Compared to comprehensive income to shareholders of $1 3 billion in the first nine months of last year again. This was driven by both fixed maturity in public equity valuations, it's worth highlighting that given the magnitude of our equity portfolio. We believe generally accepted accounting principles, which require that we include unrealized gains and losses on equity securities and net.
Income create volatility in revenues and net income, which can obscure the strong operating performance of our businesses.
Finally, I'll make a few comments on cash flows capital and our balance sheet net cash provided by operating activities was $1 9 billion in the first nine months of this year compared to $1 6 billion same period last year operating cash flows in 2022 reflected strong cash flows from our underwriting operations given the growth in premium volume.
Total shareholders' equity stood at $12 3 billion at the end of September compared to $14 $7 billion at the end of the year again. This decline is driven by declines in both the fixed maturity in public equity valuations as I previously discussed July 1st we retired $350 million of four 9% unsecured senior notes and during the first nine months of 2022, we repurchased one.
62000 shares of our stock under our outstanding share repurchase program.
With that I'll turn it over to Richie to talk more about our insurance business.
Thanks, Jeremy and good morning, everyone.
We produced another strong quarter of operating results within our insurance businesses benefiting from reduced volatility within our underwriting operations. This was partially achieved through adjustments in our property catastrophe underwriting strategy and appetite over the past few years our.
Our combined ratio for the quarter of 93 includes hurricane Ian a significant industry catastrophe event.
Ian added four points of underwriting loss to our third quarter combined ratio.
In previous years, the impact of a catastrophe event of this size would have had a more adverse impact on our underwriting results.
We continue to see strong top line growth across our product lines, achieving 19% growth for both the quarter and year to date periods within our underwriting operations.
Total underwriting premium production past seven 5 billion for the nine months.
This exceeds the total underwriting production volume for the full year, just two years ago in 2020.
While we continue to benefit from mid to high single digit rate increases across our underwriting operations. Our production growth has also been significantly influenced by new business growth.
Government of new products, and the Onboarding of new program relationships.
Our focus on expense discipline and scaling our operations produced a year to date expense ratio of 33% representing a two point improvement from a year ago.
Consistent with my comments last quarter, and Jeremy's comments, we remain cautious in our approach to recognizing prior year loss reserve takedowns in keeping with our conservative reserving philosophy.
While we are seeing favorable actual versus expected loss trends in many of our product lines and the most recent accident years.
We are being cautious about realizing these potential benefits and then.
Until the impact from various forms of inflation.
Necessity delays are more fully understood.
Now I'll discuss our year to date results within our insurance engine, which include our underwriting operations program services and fronting operations and our insurance linked securities operations.
So let's dive into the insurance segment.
Gross written premiums and earned premiums in the insurance segment were up 21% for the first nine months of this year.
We realized 15% or higher premium of growth across all our major product lines with the exception of workers' compensation, which while growing continues to face small rate decreases.
Premium growth was most notable in our general liability and professional liability product lines.
The combined ratio for the first nine months of the year in the insurance segment was 91% compared to 88 last year.
The current year combined ratio included $90 million or just under two points of net losses related to hurricane Dorian and the Russia, Ukraine war versus $89 million or just over two points of net losses last year related to 2021 catastrophes.
Excluding the impact from these event losses, the combined ratio increased by three points due to less favorable development on prior year losses, partially offset by a lower expense ratio due to benefit from higher earned premiums and relatively flat operating expenses.
The lower favorable development on prior accident year losses was driven by lower takedowns in our longer tailed product lines, such as our U S general liability and professional liability books.
As I mentioned earlier, we're taking a cautious approach in our reserving process to realizing prior accident year loss takedowns.
And at the same time, we are reacting quickly to pockets of adverse development.
We also increased our attritional current accident year loss ratio in the third quarter within these product lines to reflect the claims trends we have been seeing in the past few quarters, including responding to general inflationary trends.
On a year to date basis, our current accident year Attritional loss ratio remains down slightly versus the prior year as pricing and underwriting actions are modestly ahead of claims trend.
Turning next to our reinsurance segment gross written and earned premiums within the segment were up 5% for the first nine months of the year.
Premium growth was driven by higher premiums in our general liability and professional liability lines from both new business and higher renewals to import to more favorable rates along with the impact from favorable premium adjustments in our general liability and credit and surety lines.
This growth was this growth was partially offset by lower premiums in our property and workers' compensation lines due to nonrenewals.
Our property line continues to run off as part of our catastrophe strategy with the transition of our reinsurance property lines to develop and the decision to discontinue writing retro property business within our underwriting operations.
The reduction in workers' compensation is due to the non renewal of a large quota share treaty in the first quarter.
The combined ratio for the first nine months of the year within the reinsurance segment was 93% versus one a year ago. The current year combined ratio included $15 million or two points of net losses from the Ukraine, more compared to $93 million or 12 points of net losses last.
Last year related to 2021.
<unk> events.
The transition of our reinsurance property lines and the exited retro reinsurance lines resulted in reduced volatility, which significantly benefited our reinsurance segment's underwriting results.
Excluding the impact from these events the reinsurance segment combined ratio decreased by five points from a year ago, primarily due to favorable development on prior accident year losses, this year versus adverse development last year.
The segment had two points of favorable loss development. This year due to favorable loss development in our credit and surety and property product lines, partially offset by the impact from favorable prior year premium adjustments.
Last year the segment was impacted by four points of adverse development, primarily within our property product lines, including three points of adverse development related to losses attributed to COVID-19.
We continue to make progress towards our combined ratio target of 90%.
Excluding cat and specific events year to date, we're sitting at a 91 versus <unk> 93, a year ago Cigna.
Significant efforts made by Jed Rhoads, and our reinsurance team around re underwriting our reinsurance portfolio are starting to show through in the financial results.
As we announced last quarter, Chad is going to be retiring at the end of the year. After an incredible 40, plus years and the reinsurance industry.
We thank him for all of his contributions to markel, including successfully repositioning our global reinsurance operations for sustainable profitable growth.
Next I'll touch on our program services and other fronting operations and our ILS operations.
Of which are reported as part of other operations as a reminder, almost all of the gross written premium within our program services and other and other fronting operations as ceded.
Our program services and other fronting operations continue to grow with total premium production of $2 6 billion. This year versus $2 3 billion last year and produced total revenues of $105 million this year up 18% from a year ago.
Margins in this area of our business remains strong as does our new business pipeline.
Within our Nephila operations operating revenue from the year were down versus last year due primarily to the disposition of our velocity MGA operations in February we.
We recognized a gain of $107 million in the first quarter of this year associated with that transaction.
Further we finalized the sale of our <unk> in October for an estimated cash consideration of $155 million gain from which will be recognized in our fourth quarter results.
<unk> assets under management were seven 8 billion as of September 32022.
While hurricane Ian had a significant impact on investor returns the invested the estimated losses were consistent with <unk> expectations for an event of this magnitude.
Nevertheless, this significant Ian loss and Investor fatigue around recent cat activity, we will continue to adversely impact to assets under management.
Ill end with a few comments about market conditions and outlook as we look to finish the year strong as I think everyone knows we are currently transitioning leadership of our insurance engine over to Jeremy.
And he and I will be happy to take questions during Q&A.
As I noted earlier and as noted on many of our peers earnings calls rates continue to gradually moderate in most lines exceptions continue to be cat exposed property in lines, such as aviation terrorism War and political violence, which has been impacted by the UK, Ukraine War and other loss.
<unk> events, including Hurricane Ian.
We continue to see strong submissions new business opportunities in total premium writings, despite uncertain financial markets and fears related to a potential economic slowdown.
Inflation in all its forms continues to be a significant focus for us and the industry.
As I discussed last quarter going into 'twenty, two we had already baked more inflation into our pricing and loss reserving.
During the third quarter, we adopted an even more cautious approach, which impacted both our prior accident year reserve releases and our current accident year loss picks.
As has always been our philosophy, we will respond quickly to potential adverse trends and will be slow to recognize positive trends until they can be confirmed.
Most of our products pricing basis are impacted by inflation and this helps to some extent to offset offset claims trend.
However, we're not prepared to rely on this to maintain rate adequacy.
While overall market conditions remain favorable we have been disappointed to see more price competition in certain lines of business we.
We see absolutely no justification for price decreases given all of the risk factors, we have previously discussed.
We're going to continue to push for what we believe are must have rate increases and we're prepared to walk away from business that is not adequately price.
Fortunately, we feel we are well positioned to both act with discipline and grow profitably given our broad product diversification and market leading capabilities.
Interestingly, we find ourselves at the end of the third quarter of each year and are remarkably similar position to 2021, we need a strong finish to the year to achieve our profitability goals of a 90% combined ratio or better.
We know our team will continue to work hard in pursuit of this goal.
Thank you for your time today, and now I'd like to turn it back over to Tom.
Thank you Richie I hope that I conveyed my optimism and gratitude for how all three of our engines are firing these days and our overall circumstances Mark Hello, My opening comments I think the best I can do at this point is just open the floor for questions so with that Regina.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press star one again at this time, we will pause momentarily to assemble our roster.
Our first question will come from the line of Mark Hughes with <unk>. Please go ahead.
Yes, thanks, good morning.
I Wonder what you can say in terms of signals you are getting about the economy. When you look at your insurance.
Operations also debentures, you say construction is doing pretty well and I'm curious, whether you're seeing any kind of signs of things may be slowing.
Yeah. Thanks, Mark it is of incredible value to have the windows that we have both through what each individual underwriter would see and what we see through the various businesses that we're in across the economy and what I will tell you is.
It's hard and it's challenging and every single business is dealing with labor.
Labor issues supply issues.
Yes.
Inflationary pressures, but at the same time, we continue to increase prices in response to increased cost and there is plenty of business to be done so it keeps on keeping on.
Very good when.
When you look at the reinsurance segment, obviously excludes property is hard.
Hardening up.
Is that spilling over into other lines and is that going to create.
Opportunity within reinsurance or insurance and reinsurance segment as well.
Hey, Mark it's Jeremy maybe I'll start on that.
I think youre right to point out in this property is certainly part of the story I think marine and aviation lines because of this year's events are also part of that story. So we've seen if were on the table relative to our outwards programs and we see where we're at the table from our inwards programs. The conversations are definitely a little more tense and I think.
<unk> is a little more scarce and I think that it's creating a little bit of a firming opportunity. So I would anticipate that that has broader implications across our casualty and specialty lines.
As well so we're going to we're going to see and learn a lot more I think in the next few months, but.
We've seen a little bit of a gap differential over the last couple of years between house, where the primary insurance basis working in the reinsurance space and I would say it is certainly hardening more right now in the reinsurance space.
I didn't really think about your growth in insurance and 21%.
This.
This quarter.
I hear your description of.
Some pockets of price competition, you've been careful about inflation.
Let's say the <unk>.
Are you seeing increases are moderating, but still seeing it.
Looking at the written premium growth that youre seeing a lot of good opportunity.
Any way to kind of square all of that.
The optimism on the P&L versus the cost within the deal.
Language and description here I think.
The way to square it is youre right Mark.
Things are good and.
<unk> and the way we speak we are inherently conservative people. We always have been we always will be so we never want to take things for granted and we never want to.
Sugarcoat things, but things are pretty good.
Hey, Mark make maybe Jeremy ill add to that.
This is a demonstration of the work that we've been hard at across our insurance operations for quite some time. So I think we benefit from broad product diversification global capabilities strong trading relationships multi distribution platform, we are achieving rates got new product innovation. So.
That's allowing us to grow but what we're laser focused on is growing profit at this at the same time I think we have the ability to act with a high degree of discipline that squares comments about the importance around rate adequacy, the importance of disciplined and the importance of knowing when we got to push away from the table up at the <unk> with the opportunity for us to grow at <unk>.
As well as what I think that pretends for future quarters, and that's what we've been hard at work at.
Understood. Thank you.
Our next question will come from the line of Mark <unk> with RBC capital markets. Please go ahead.
Yes, good morning.
Let me start with an accounting question.
The $53 4 million of reserve release that related to Cat and my correct understanding that you guys were effectively just a pass through for that it passed through one line and then back out through the minority interest or was there any other.
Plus or minus that was caught up somewhere else in the results that may not have been obvious.
Hey, Mark it's Sharon.
Great Kevin So you're exactly right, it's really just geography.
That is a straight pass through any we continue to wind down the reserves, we continue to execute Commutations, where we can where there are savings that pass through to the benefit of the original investors.
We see that the sort of the benefit come through as a favorable and the other expenses. The offset is a noncontrolling interest kind of below the line just be aware of that.
Right, Okay, My old accounting professor would be proud that our retained Damian.
Yeah.
Yes.
Anyway, sorry.
Question that I have.
And this may be probably for Jeremy and Richie.
You've talked about your increasing caution on the reserving and the loss picks.
Yes, we've got some pretty decent pricing still and we obviously have inflation.
Can you talk kind of.
For year to date, we're still an improved accident year margin can you just talk about kind of the evolution of your thinking on that over the course of the year end.
I guess all else equal I mean could it I guess it could have been better had inflation not been as severe as it's been is that the right way to think.
Yeah, Mark I'll start maybe Richard jump in.
That is a good way to think and we'll necessarily get into numbers are certainly a line by line view, but overall I think we feel that rate and underwriting actions are keeping just ahead of trend.
And that expands to our acknowledgment that in an inflationary environment.
Exposure has it affected acting like right to a certain degree as well. So that that is why we are incredibly focused on rate adequacy, if we weren't in and elevate inflationary environment without a doubt the results would even be stronger I think you know us well and Richie touched upon this earlier.
We have a very long standing philosophy with regards to how to approach reserves.
Focused on more likely redundant than deficient focus on reacting to bad news. If you will very quickly and taking a much more measured view the good news.
Anywhere over time, and where we are in a cycle, but I think that's even more so the case now so I feel like despite in a flat inflationary environment and we can we can take those actions the ritchie and our mentioning we can still generate favorable prior year development, we can in fact maintain or improve our confidence.
In our loss reserves and we can still generate.
Certainly on an ex cat basis, the combined of 90 or better that's a pretty good place I think for us to be at this stage.
Yeah, and I'll just add.
Just real quickly Mark I'll just add.
It's been a while since anybody has seen inflationary pressures like the ones we've seen recently.
And so we're having to kind of reeducate underwriters actuaries accountants every body.
Tom and I have seen this kind of inflation, but a lot of the rest of the people around here have not so it.
It's safety first at Markel and it always has been that way in terms of the reserves.
<unk>.
Will we.
We're more than happy to make sure. The reserves are at the confidence level that we want and if that means there is potentially some reserve decrease is down the road that's great, but I think that's how we're trying to view this current situation.
I appreciate those comments and I guess with that in mind, it kind of raises to two maybe follow up questions directly to that point. So if youre kind of that conservative plus in terms of thinking about.
Your picks and reserving.
What are the sign posts, you're looking for that would move you back to just merely conservative that will be the first question and then the second I mean as you weigh up the pricing environment now the inflationary trends that youre seeing.
Would it would it still be the case that more likely than not accident year margins would improve next year or youre not willing to go that far.
Yes.
I think it's hard to say whether things an accident.
Margins improved because we got a lot of variables right. We don't know what the rate increases are going to be next year and we also don't know what their true rate of inflation is.
I know you're going to hate this answer, but but the true thing that we need to be able to start potentially reducing our loss picks and increasing prior year releases as time, we need to we need to see we need to see it.
So I think it's just a matter it's going to be a matter of time and given current risk factors I think it will take more time.
Yes, I'll jump in smart with some formal accounting comments here can you remember the movie my cousin Vinny.
There was a scene in there where the character that was played by Joe Patrick was was hustling, some pull and he got into a little bit of a match with some of the locals there and they wanted to bet and he said well Where's your met to backup that you asked them to show them the catch up.
The states that they wanted to vessel and of course, they didn't have it and as the recurring revenues and it came back and that's a big lot of money and just how do I know that isn't just <unk>.
The ones with the 'twenty wrapped around it and sure enough that's exactly what it was well.
The good news when we're debating and trying to think about how this reserve reserves might develop overtime remember we did collect premiums upfront. We do have the cash for what we're talking about that we will see how they develop over time, but we do hold the cash and we are investing the cash at higher and higher rates of return so.
We continue to operate with the belief that we want our reserves to be more likely to be redundant than deficient.
And we have the cash while we're waiting for as Richard said time, just to say the claim of several of its done we know in the meantime, economically we're earning the returns from workout.
Okay. Thanks for that I think thats. The first 20 years of doing this thats the first Mike cousin Vinny.
Reference I've ever gotten in response to a question that I've asked.
That way I won't have to ask you whether.
Mark Heller as the Pizza, if you're in New York style or Chicago.
Sure on your colors on that one.
I don't know what we're aiming for lunch now.
Yes.
Yeah.
Thank you thanks for those I'll, let others jump in.
Again, if you have a question. Please press Star then one our next question will come from the line of John Fox with Panama or asset management. Please go ahead.
Yes, good morning, everyone.
First congratulations on the reinsurance results.
Hi.
I have a number of questions for Tom.
Tom you have been.
Holding on to about $2 billion short term investments for quite some time.
Okay.
Another $3 billion of cash.
And theres been no opportunity cost for doing that but today. There is although short term rates you can make a decent return.
Can you talk about.
The opportunity cost today and would you invest some of that cash and short term investments an increase in yield going forward.
Well the good news is while there's a lot of chatter in conversation about that issue over the last year or so.
With hindsight.
In retrospect, it looks like a pretty good decision. So the rates of return on that cash are going up and we are deploying it as we talked about in terms of buying equities and repurchasing our own stock and given the profitability of the capital position, but we will do is is to continue to invest it in a methodical and disciplined way.
Im not going to Chuck it into the market.
Once we'll do the same thing we always do just steady steady steady steady steady incremental incremental incremental iterate iterate deteriorate to a better and better return, but have no market forecast that I have no crystal ball.
Well, we're putting too much work.
Yes, I guess.
$2 billion in short term investments could that be a $1 five and $600 million of corporates, where you could add five 6% on pretty short duration like are you thinking about that or you are moving towards.
For four and a half on short time and that's okay.
Yes.
It is.
It's not awful, especially compared to what it has.
Okay.
Okay very clear. Thank you John I can I can recall a conversation with you. Many many years ago, where you made the comment about mark asset.
They may not always do what you want them to do but they will always do what they say they will do so you and I are in agreement and we.
We might pace at a little differently than you would if our roles will reverse but we're doing the same thing.
Your answer was very clear thank you.
The other point on investment income and sometimes on these calls we get an interesting lecture on accounting.
And I would say that and I like your reaction to this.
Thank you and net investment income is actually doing better than you suggested.
If I read the K Q correctly $108 million of net investment income includes about $5 million.
Marks from Haggerty.
Yes, exactly like more than that so the equity method of investing and believe me that is one of those centers. The starts around here with I used to be an accountant and in those conversations.
So yes.
So for instance.
There was one investment that we made.
Probably 10, or 12 years ago, and I cannot recall with precision whether it was $25 to $50 million, but it was one of those two numbers and I think we've we've recognized cumulative gains and losses of well over $100 million.
Each way of gains is what Brian over time, depending on the mark to market that quarter. It's the same thing that happened when we grow the credit default swap that we ended up.
Having a wonderful experience with long time ago, the quarterly swings that come through equity method accounting do indeed, obscure whats really happening and fundamental economics, so youre reading the Q right.
That's why I used the new term of recurring.
Recurring net investment income this year I think to the first nine months the numbers about 50 million Bucks in total on the equity method things. If you. If you took that out of the mix and looked at recurring recurring net investment income is going up at a faster rate than what was reported in this quarter's results Hey, John This year I mean just to piggyback.
John Terry just to piggyback off Toms comments.
All of our equity method investments are included in that line I think of them. So it's not just <unk>. So I wanted to sort of make that point and then Tom is exactly right. The year over year shift is $50 million. So instead of on a nine months basis being down $10 million would be up $40 million.
Right that's right that's exactly that.
Our recurring investment income from the portfolio is growing and increasing the return on equity.
Is that the right way to think about it yes.
Yes.
And to add insult to injury on the hagrid piece, it's worth about half a billion dollars more than what's on the financial statements right that.
That is correct.
Okay. Thank you and then.
To that point.
Yes, so call it half a billion dollars.
The only thing we've ever recognize our losses.
Right.
Okay, and then final question for you.
On the venture side.
Look at the <unk>.
Products.
I'll take the products.
Avenue and subtract the expenses, it's about a 1% margin.
Which is I'm sure not reflecting a reality.
Talk about anything that went on there in the third quarter or is there anything unusual or is that seasonality.
Yes, I don't know I know one of the things that will be going on in terms of the EBITDA profitability up up to book.
The set of businesses to the extent that we have distribution businesses.
As a high volume low margin, but it's a wonderful return on capital in the business.
The mix is skewing a bit that way at the moment, but I'll have to look at and think about exactly you were asking about on that.
Okay, great. Thank you.
And then Richard for you.
Typically ILS.
<unk> had a big fourth quarter.
Yes, that's been our best quarter for profitability I guess, those things get crude up from the investment year.
Do you expect that to happen.
Happen again, this year or what.
Hurricane has is that off the table.
I guess I have to say John I don't know.
So fourth quarter is usually when you look hard at the sot pockets and see if they can be released and that.
Releases trapped fees.
I don't know where that stand this year, just simply because of.
Yes, I'd like to say, Ian I think theres going to be quite a bit of focus on making sure you get reserves correct for Ian also in terms of this is the cap Tom that you do capital raising.
So I guess, sorry answers I don't know.
Okay, that's fine.
I appreciate it thank you everyone.
Thanks.
This concludes our question and answer session I would like to turn the conference back over to Tom Gayner for any closing remarks.
Thank you for joining us we will talk to you again in about another 90 days.
The conference call has now concluded. Thank you for attending today's presentation you may now disconnect.
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