Yahoo Finance Markel Corporation (NYSE:MKL) Q1 2024 Earnings Call Transcript
Markel Corporation (NYSE:MKL) Q1 2024 Earnings Call Transcript May 2, 2024
Markel Corporation isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning and welcome to the Markel Group First Quarter 2024 Conference Call. All participants will be in a listen-only mode. [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 first 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 Statement 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 first quarter 2024 results or our most recent Form 10-K. The press release for our first 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 turn the conference over to Tom Gayner, Chief Executive Officer. Please go ahead.
Tom Gayner: Thank you, Sarah. I appreciate it. Good morning and welcome to the Markel Group first quarter conference call. This is indeed Tom Gayner, your CEO. I'm joined today by Brian Costanzo, our CFO; and Jeremy Noble, the President of our Insurance operations. As always, we look forward to checking in with you about our results. We view our long-term shareholders as partners. We welcome the chance to provide you with an update on how things are going as well as our plans and dreams for the future. We also look forward to answering your thoughtful questions. As a quick review of the bidding, at the Markel Group, we are working to build one of the world's great companies. We view a great company as one that operates a win-win-win system.
We want our customers to win because they bought products and services from us that served their needs. We want our associates to win by serving our customers supporting their families and communities, continuously learning and being creative. We want our shareholders to win as we earn profitable on the capital we use to do this work. That's what win-win-win means to us. I'm delighted to report to you that we're off to a good start and doing exactly that so far in 2024. I'm going to channel my inner [indiscernible] right now by saying in 1972 Johnny Nash recorded a number one hit called, I can see clearly now the rain is gone. You have no idea how hard it is for me to just save the title without singing it. In 1993, Jimmy Cliff covered it for the movie called, Cool Runnings.
Well covering that song continues. The Markel Group is laying down tracks of another cover so far in 2024 and we'll do our best to work our way through the verses as the year progresses. Brian will quantify the notes with numbers in just a minute, but let me speak qualitatively about the music. Here's why that song comes to mind for me. I've got four bullet points in mind. Usually I try to keep the list of three, but I just can't help myself today. Point one; we've got improving results in our insurance engine. Jeremy will provide you with some details in a few minutes. I want to thank him and his team personally for the efforts they have expanded in improving our results. I am grateful for their work. Thank you. Point two; our Ventures companies continue to produce excellent results.
I want to express my appreciation to the leaders of the Markel Ventures companies and their teams for their accomplishments. Point three; we enjoyed excellent returns on our investment operations. Recurring investment income continues to rise rapidly. We're investing our cash flows from operations and maturing bonds into higher-yielding securities. Dividends from our holdings of publicly traded equities also continue to grow. Point four, we continue to repurchase our shares. We started to repurchase shares in meaningful quantities in 2022 as we believed the share price traded at a significant discount to our calculation of what we thought a share of Markel was worth. In 2023, we thought that gap widened, so we bought more shares than we did in 2022.
In the first quarter of 2024, we thought the gap widened more, so we bought more. In fact, we nearly doubled our purchases in the first quarter to $161 million compared to $82 million a year ago. From roughly $14 million outstanding shares as recently as February 2019, we ended the first quarter with $13 million, and as we speak now, we are below that milestone. Each share of the Markel Group continues to own a greater percentage of our insurance, ventures and investment operations. As a shareholder myself, with the majority of my net worth in Markel stock, that seems like a good thing to me. If we continue to earn the sort of returns that we are now, and if the marketplace continues to assign a meaningful discount to our shares, at our current rate of repurchases, we'll get the share count down to one in a little over 30 years.
I suspect the market will catch on before we get to that point. Also, in recognition of our commitment to long-term thinking and progress, we updated our press release format to include five years of data, as well as that of the current quarter. We remain focused on long-term actions and measures, and we hope the new format speaks to that commitment. The format also describes the metrics we use to calculate incentive compensation. We think five-year measurement periods do a good job of demonstrating our commitment to long-term accomplishments and accountability. We also hope that the report provides clarity as to how we measure progress. Finally, I'd like to reiterate our invitation to join us for our upcoming annual shareholders meeting, which we call the Reunion.
We'll be back at the Robbins Center at the University of Richmond on May 22nd, and we'll start at 2 p.m. Last year, we had so many people that traffic got clogged. We encourage you to come early. The annual meeting is the best setting to enjoy the company of your fellow shareholders, see what condition our condition is in, ask questions of management, and meet some of the people of Markel from all around the world. Please make sure you register at www.mklreunion.com so that we can have credentials ready for you to get into the Robbins Center quickly. I love our team, and I am proud of what they continue to accomplish. I hope you feel the same way, and I look forward to seeing as many of you in person in May as is possible. Before I turn it over to Brian, I'll share what I hope to be saying in upcoming periods.
As Johnny Nash sang after the first line of I Can See Clearly Now, I can see all obstacles in my way. Gone are the dark clouds that had me blind. It's going to be a bright, bright, bright, sunshiny day. That's what I hope to be saying in future calls. We will do our best to make it so. With that, I'll turn it over to Brian. Jeremy will follow with his comments, and then we'll open up the floor for your questions. Brian?
Brian Costanzo: Thank you, Tom, and good morning, everyone. Before I dive into the quarter's results, I'll make a few comments on the changes within our earnings release and 10-Q for the quarter. We believe these changes provide a clearer picture of our overall performance. First, we move to a consistent measure of profitability of operating income across each segment of our business that excludes amortization of acquired intangible assets. We do not consider these costs when assessing the performance of our businesses and believe it helps investors to provide a consistent performance metric across our operating segments. Additionally, as Tom mentioned, we incorporated a longer-term view of our key metrics within our press release to provide more perspective on our performance, consistent with how we evaluate performance for incentive compensation purposes.
In any given quarter or year, there are many factors that can create volatility in results, which is why we consistently measure our performance over five-year periods. We hope you'll find these changes helpful as you review our results. With that, let me take you through our consolidated results for the period. Total revenues increased 23% to $4.5 billion with each of our three engines achieving year-over-year top-line growth with the most notable growth coming from our investments engine. Operating income grew by 77% to $1.3 billion during the first quarter driven largely by an increase in net investment gains in the quarter, highlighting our longer term view where short-term changes in the valuation of our equity portfolio are more normalized, we have created cumulative operating income of $8.7 billion over the past four years plus the first quarter of this year.
Total net income to common shareholders was $1 billion in the first quarter of 2024, compared to $489 million in the same period of 2023. With the change primarily attributable to higher net investment gains on our public equity portfolio in the first quarter of 2024, compared to the same period of 2023. Comprehensive income to shareholders in the first quarter of 2024 was $909 million, compared to $646 million in the same period of 2023 with the favorable change in the public equity valuations being partially offset by an unfavorable swing in our fixed maturity portfolio. Net cash provided by operating activities was $631 million in the first quarter of 2024, compared to $284 million in the same period last year. 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.
Total shareholders' equity stood at $15.7 billion at the end of the first quarter. As Tom mentioned in the first quarter, we repurchased $161 million worth of shares of Markel Group stock under our outstanding share repurchase program, compared to $82 million in the same period last year. With that, I'll now turn to the performance of each of our operating engines starting off with our insurance engine. Gross written premiums within our underwriting operations grew 4% to $2.8 billion for the first quarter of 2024, compared to $2.7 billion for the same period last year. Our increased premium volume reflects new business growth and more favorable rates on many lines within our international portfolio and select US lines of business. We are working hard to rebalance our diversified portfolio of products, which has resulted in contracting premium writings in certain classes particularly within pockets of our US Professional Liability and General Liability portfolios.
Jeremy will go into more detail about changes in the mix of business and the impact of our underwriting actions on top line premiums in his comments. Our consolidated combined ratio for the first quarter was 95% compared to 94% in the same period of 2023. The increase was primarily attributable to a higher attritional loss ratio within our US General Liability and Professional Liability product lines within our insurance segment. Prior year loss reserves developed favorably by $77 million this year versus $71 million in the first quarter of 2023. Favorable development in the first quarter this year was most notable within our international professional liability and marine and energy product lines. We remain cautious and conservative in our approach to both current year losses and reducing prior year loss reserves on our longer-tail US professional liability and general liability lines given recent playing trends.
Within our program services and ILS operations, operating income increased 33% to $23 million, primarily driven by growth within program services and other fronting. Moving next to our investment results. We reported net investment income of $218 million in the first quarter of 2024 compared to $159 million in the same period last year. We continue to benefit from higher interest rates as the yield on our fixed maturity portfolio, short-term investments and cash equivalents all increased. Additionally, we have been allocating more cash to money market funds and fixed maturity securities to capitalize on the higher interest rate environment. We expect based on the current interest rates 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.
Net investment gains of $902 million in 2024 reflect favorable market movements, resulting in a return of 9.8% on our public equity portfolio in the first quarter. This compares to net investment gains of $373 million in the first quarter of 2023. As you've heard us say often before, and I'm sure you'll hear me say again, we focus on long-term investment performance expecting variability in the equity markets from period to period. At the end of March, the fair value of our equity portfolio included cumulative pre-tax unrealized gains of $7 billion. Net unrealized investment losses and other comprehensive loss in the first quarter of 2024 were $123 million net of taxes compared to net unrealized investment gains of $164 million net of taxes in the same period last year.
These movements correspond to changes in the fair value of our fixed maturity portfolio, resulting from changes in interest rates. Recall that we typically hold our fixed maturities until they mature and would generally expect unrealized holding gains and losses, attributed to the changes in interest rates to reverse in terms of periods as bonds mature. Additionally, we continue our long-standing precedent of investing in the highest quality of fixed income securities. As of March 31 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 turn to our results from our Markel Ventures engine. Revenues from Markel Ventures increased 3% in the first quarter of 2024 compared to the same period last year, reflecting moderate revenue increases at our consumer and building -- Consumer and Building products and Construction Services businesses.
Markel Ventures operating income increased 13% and driven by higher revenues and improved operating margins at our Consumer and Building products businesses versus a year ago. Our Markel Ventures companies continue their excellent long-term performance, and meaningful contribution to our operating results and cash flows. With that, I'll turn it over to Jeremy to talk more about our insurance engine.
Jeremy Noble: Thanks, Brian and good morning. As you heard from Tom and Brian, the actions we took from the start of the year to improve the overall health of our insurance operations are beginning to bear fruit. We spent much of the first quarter, implementing the significant corrective underwriting actions that I discussed on our earnings call, a quarter ago, which I believe will improve future profitability. These steps addressed where we recently underperformed particularly within our US Specialty Insurance operations. At the same time, we work to meaningfully grow in the products, geographic territories and industries where performance meets or exceeds our long-term profitability targets. For the first quarter of 2024, our combined ratio was 95%.
That result exceeds our ultimate goal, but is in line with where we expected to be at this point in the year. It also shows meaningful improvement from where we stood in the fourth quarter and for the full year of 2023. The impact of our portfolio management actions, are most evident in our gross written premium volume for the first quarter. On the surface, we grew a modest 4% versus a year ago. However, you need to disaggregate that growth a bit to appreciate the effectiveness of our underwriting actions. We use portfolio management tools each quarter to monitor portfolio health and rate adequacy and to evaluate the profitability of each of our products. You might think of this like a traffic light system, where we assign a color of green, yellow or red to each product line.
Those colors show the degree of rate-adequacy and associated combined ratio deviation for market profitability target for each product. I'll use this construct to demonstrate, how we are remixing the portfolio towards our most profitable lines. Within our green product classes, which represent products that are significantly outperforming our combined ratio targets, our premiums grew by 14% during the first quarter. Around 40% of our overall gross written premiums fall into this category at the moment. On the flip side, our red product classes where profitability is underperforming our combined ratio targets. Gross premium volume decreased by 16%, during the first quarter. At present, a little more than 10% of our portfolio falls in this category, which is actively being managed.
Let me be clear, for many of these lines, we are still operating in an underwriting profit, but at a combined ratio that is above our target. For each product, we have a robust set of underwriting action plans to get us back to an acceptable level of profitability, in a reasonable period of time and our plans take into consideration current market dynamics and long-standing relationships. This contraction in the first quarter of 2024, focused on several product classes within our US and Bermuda Casualty and Professional Liability portfolio. These underwriting actions were most notable in our brokerage excess and umbrella and brokerage primary contractors general liability lines within Casualty. Our large account risk managed errors and emissions and directors and officers' lines within professional liability.
Our underwriting actions consist of a mixture of rate increases, changes to terms and conditions, evaluation of limited attachment points and redistribution of geographical industry mix. We also decreased the overall proportion of Construction business within our Casualty portfolio and improve the profitability outlook for our existing book. In certain instances, we identified product lines that were not expected to be profitable. In these circumstances, we made more meaningful changes, including exiting certain products or subclasses. We discontinued writing several product classes in our Insurance segment in the first quarter, where we believe underwriting action plans would not enable us to reach our profitability goals. Some of the areas we exited included Retail Primary Casualty, Risk-managed Architects and Engineers and Intellectual Property Collateral Protection lines.
In total, the Lines and subclasses we exited represented less than 2% of our Insurance segment operations on an annual basis. We also non-renewed a handful of Professional Liability quota share contracts within our Reinsurance segment that did not meet our pricing targets. Overall, we remain thoughtful and disciplined about how we handle long-term portfolio management. Turning to the positive. We've seen profitable growth within our US Specialty Insurance Operations within our Property and Inland Marine, Personal Lines, Programs, Binding and Commercial Professional Liability products. Within our International portfolio, we've seen profitable growth across a number of products, including our Marine and Energy, UK and European businesses. Within our Global Reinsurance Operations, we opportunistically pursued growth within the London market Specialty Marine and energy space.
With a large, well-diversified global platform, we see plenty of opportunities to grow and enhance our overall portfolio construction. We are focused on doing just that. We've taken strong and decisive actions to deliver improved combined ratio results going forward. It will take time for these underwriting actions to earn through and impact our combined ratio, but we're confident that we're on the right track. Meanwhile, we remain conservative in our reserving practices, especially in regard to our longer-tail product classes. We also continue to increase reserve margins of new business to buffer against uncertainty, around longer-term loss trends. Finally, I'll share a few thoughts on the current pricing environment and overall insurance market dynamics.
In general, we continue to see ongoing modest rate increases across our diversified product portfolio. Property continues to see meaningful rate increases, although at a more moderate level than a year ago. In our Casualty Lines, we are achieving high single-digit in some cases low double-digit rate increases across most of our product classes. Rates remain in line or better than our view on loss trends. We've seen a mild softening of rate increases throughout a large part of our International portfolio. Our international book continues to be priced attractively compared to loss trends and combined ratio targets. As such, we continue to actively grow in many of these lines. Finally, within Professional Lines, we see ongoing rate decreases in many classes, most notably in Public D&O.
As a consequence, we decreased writings in these classes. In closing, I want to reiterate we finished the quarter largely where we expected. We recognize that it takes time for actions to earn through and create credibility. However, with our refreshed leadership team and renewed focus, I believe it is only a matter of time before we begin reporting results more in line with our longer-term aspirations. Thank you. With that, I'll turn things back over to Tom for questions.
Tom Gayner: Super. Thank you, Jeremy. Thank you, Brian, and Sarah, if you'd be so kind as to open the floor for questions.
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