Good morning, and welcome to the Markel Corporation Second Quarter 2019 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 options concerning a variety of known and unknown risks. Actual results may differ materially from those contained in or suggested by such forward-looking statements. Additional information about factors that could cause actual results to differ materially from those projected in the forward-looking statements is included under the captions, Risk Factors and Safe Harbor and Cautionary Statement in our most recent annual report on the Form 10-K and quarterly report on Form 10-Q. We may also discuss certain non-GAAP financial measures in the call today. You may find the most directly comparable GAAP measure and a reconciliation to GAAP for those measures in our Form 10-Q, which can be found on our website at www.markelcorp.com in the Investor Relations section. Please note this event is being recorded. I would now like to turn the conference over to Tom Gayner, Co-Chief Executive Officer. Please go ahead.

Thank you, Andrea. Good morning. This is Tom Gayner. I’m joined this morning by my Co-CEO, Richie Whitt and our CFO, Jeremy Noble, and it is our pleasure to welcome you to the Markel Corporation first half 2019 financial update call. The purpose of this call is to connect with you, our owners and to provide you with an update on our financial performance through the first half of 2019. We’ll also offer some commentary about current events and circumstances around Markel. And we look forward to any and all questions you’d like to ask us about your business. We’re pleased to report you that we’re off to a good start to the first six months of 2019. The overall financial results are quite good and Jeremy will provide you with the numbers and some details in just a minute. As always, Markel is a complicated place. One beauty of that complication though is that we’ve created a structure and architecture, which fosters the ability to make good capital allocation choices and absorbed some learnings and tuition, we sometimes pay along the way so that we can keep getting better. As we’ve discussed for many years, our rank order and allocating capital is first to invest in and support our existing businesses, when we have reinvestment opportunities to help them achieve profitable growth. Second, we look for acquisitions that add to our existing businesses or create new fields for us to plan. Third, we build our portfolio of publicly traded equities, securities. And fourth, when appropriate, we repurchase Markel stock. We did all four of these in the first half of 2019. In addition to this financial lens and language of allocating capital, at the same time, we run and manage our business through the human lens and language laid…

Thank you, Tom. Good morning, everyone. All three of our operating engines made meaningful contributions to our results in the first six months of 2019. We continued to see outstanding performance on our investment portfolio during the first half of the year, marrying the strong performance for broader equity market. Operating results attributable to Markel Ventures operations increased substantially. We also experienced meaningful premium growth in our underwriting operations. For the first six months of 2019, total operating revenues grew 38% to approximately $4.9 billion. The increase was driven by just over $1 billion of net investment gains on our equity portfolio in 2019, resulting from favorable market movement. Additionally, revenues from Markel Ventures segment increased 10% year-over-year. Looking at our underwriting results, gross written premium were $3.3 billion for the first half of 2019 compared to $3 billion in 2018, an increase of 9%, which was attributable to higher gross premium volume in both our Insurance and Reinsurance segment. Retention of gross written premium increased one point from 83% in 2018 to 84% in 2019. This increase was driven by an increase in the net retention within the Insurance segment, resulting from higher retention on our general liability and professional liability product line, partially offset by a lower retention on our personal lines business. Earned premiums increased 5% to $2.4 billion in the first half of 2019 due to higher written premium volume in our Insurance segment, partially offset by lower earnings in our Reinsurance segment. Our consolidated combined ratio for the first six months of 2019 is 95% compared to 91% last year. The increase in the consolidated combined ratio was primarily driven by less favorable development on prior year’s loss reserves within our Insurance segment. Now I’ll cover the results of our Markel Ventures segment. Revenues from…

Thanks, Jeremy, and good morning, everyone. As Jeremy said today, I’ll focus my comments on our underwriting operations. I’ll also provide brief updates on State National program services business and our insurance-linked securities operation. Headlines for the first six months include solid underwriting results combined with strong premium growth, resulting from a combination of organic growth and an improving pricing momentum. We’re also pleased with the progress we’ve seen from our recently acquired State National and Nephila operations. So starting with the Insurance segment, gross written premiums for the quarter are up $134 million or 11% compared to the second quarter of 2018. For the first six months, premiums are up $234 million or 10%. Premium growth for both the quarter and the six months was driven by continued strong organic growth across several product lines, most notably our general liability, professional liability, personal lines and marine and energy products. Earned premiums for the segment are up 8% for the quarter and six months with similar drivers as the gross written premium increases. The combined ratio for the Insurance segment was 95% for the second quarter of 2019 compared to 92% last year. This three point increase in the combined ratio was driven by less favorable development on prior accident year loss reserves, partially offset by a lower expense ratio. The decrease in favorable development on prior accident year’s losses was primarily driven by less favorable development in our workers’ compensation line and more adverse development in our property line. Lower expense ratio in the quarter was primarily driven by the impact of higher earned premium. The combined ratio for the first six months in the Insurance segment was 95% versus 90% for the same period a year ago, with the increase driven by less favorable development on prior accident…

Thank you, Richie. Like you can see from the numbers, we enjoyed wonderful results in both Markel Ventures and in our investment operations during the first half of 2019. At Markel Ventures, we set new records in revenues and EBITDA. Revenues exceeded $1 billion during the first half and EBITDA of $161 million gives a vivid picture of the size and scope as well as profitability of our Markel Ventures operations. We continue to enjoy strong results from our industrial businesses, where we expect cyclicality. Those businesses – all continue to perform well both due to their own efforts and management expertise, as well as a continuing favorable economic environment. Our companies did tend not to be as economically sensitive, also continued to grow and perform well and we’re gaining ground in some spots where we had ground to gain. All in all, I just want to thank you, the shareholders, my colleagues, and our Board of Directors for your patience confidence that we were making good capital allocation decisions as we’ve worked to build Markel Ventures. It is delightful for me to be able to report to you overall solid organic growth and double digit percentage EBITDA profitability. That we’ve discussed, the environment to add new companies to Markel Ventures remains tough as valuations continue to be high across the marketplace. Fortunately, we continue to enjoy organic growth opportunities within many of the businesses that we already own. Also our track record of financial performance along with our values based long-term approach continues to cause people to seek us out about the possibility of joining the Markel family. We’ll keep working diligently on what we have and we’ll remain open-minded and flexible as we consider growth opportunity. In our investment operations, we have excellent results during the first half…

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Jeff Schmitt of William Blair. Please go ahead.

Hi. Good morning, everyone. I know you addressed claims trends a little bit there, but just curious if you could provide more detail. I guess, some competitors are seeing that tough legal environment, which was acute in like the commercial auto spreading into general liability and in other casualty lines. Could you maybe speak to that, what you’re seeing there?

Sure. We don’t write a lot of commercial auto, but obviously, we’re very aware of the issues that have been experienced there. And obviously trend, particularly severity has been problematic in commercial auto. I think we’re seeing and it’s not anywhere near what is being seen in commercial auto but we’re seeing some uptick in severity in places like professional and casualty. It’s manageable, but the message we’re sending our underwriters and I think it’s the right messages. These rates that we’re looking for, they’re not just nice to have, we need to have them. There is – I mean, we’ve enjoyed an incredibly benign 10 or so years, quite honestly, in terms of claims trend. You would expect some reversion to the mean over time. And we need to get some rate in professional and casualty and other areas to make sure we’re keeping up with trend.

Okay. And just a question on CATCo with that in runoff, are you seeing many funds transferred to Nephila?

Nephila? Nephila really isn’t raising funds right now. They went into 2019 after two really tough years with their investors, intent on doing the best they could to build the best portfolio for the existing investors and being 100% focused on that. So Nephila really has not been in a fundraising mode in 2019.

Okay. And just one last one on Markel Ventures, could you maybe speak to the – just what you’re seeing in the M&A environment, right now as we kind of approached the end of the cycle just from a valuation perspective or is there much of a pipeline there?

Well, as I alluded to in the comments, prices are high. So our likelihood of buying something that just comes through the traditional channels. And in an auction market is pretty [indiscernible] because the valuation gaps are just a bit too far for us to get to. That said, the good news is we’ve got a business that has an annualized run rate of $2 billion and 17 or so different companies and they’re out in the marketplace every day dealing with customers, dealing with vendors, dealing with competitors and they see and frankly generate conversations and things that we will get to see that are not just part of traditional deal flow. So the last couple of things that we have bought have come through non-traditional channels. And I’m not making any predictions but we still get to talk to some pretty interesting people with interesting businesses on a pretty regular basis and we’ll do the best we can.

Okay. Thank you.

Thank you.

Our next question comes from Mark Dwelle of RBC Capital Markets. Please go ahead.

Yes. Good morning. Just a few questions, I didn’t see any mention of catastrophe losses within the 10-Q filings. I was wondering if you had any meaningful amounts, just in the aggregator by business segment or maybe there just weren’t that many this quarter.

Mark, there’s always catastrophes. There was tornadoes and flooding and various things in the first half of the year. It was probably – and I think you’d agree to, just put it out, it was probably sort of an average first half of the year in terms of catastrophes. We just to make things a little more simple, we don’t start adding up catastrophes until they are signed a CATCo and until they have exceed a dollar threshold. So we sort of have the normal run rate of catastrophes. Not enough to call out in the financial.

Okay.

Yes, Mark, I always – this is Tom. I always looked forward to hearing how your name gets pronounced. And in this particular quarter, it would be like, thinking about what the injury report for the Pittsburgh Steelers would be. I mean, there shouldn’t be any, but there’s training camps and there’s people riding motorcycles without helmets and stuff like that that goes on but fortunately not so much at this particular quarter.

Yes. Well, that’s good. And we’ll hope the same for the training camp. On a related, somewhat related note, you mentioned also in the filings that there was a little bit of a reserve addition within the insurance segment related to prior year catastrophe losses. Could you say what that amount was?

Hey Mark. It’s Jeremy. It was very modest and across the company, there was basically almost no movement on the 2018 event, but there were some offsets between kind of reinsurance and insurance. And really we’re to the point now that we are into our reinsurance protections on the outwards, but some of that’s how we allocate some of the recoveries between the insurance and reinsurance segment, but even in the insurance is very modest.

Okay. That makes sense. Another question and this is just to clarify, there was a note that you had acquired in a minority stake in the Hagerty Group, LLC. That’s just a minority stake amongst the ownership that you already have in Hagerty, right? Or is that some different entity?

We’ve been working with Hagerty for a number of years now, but I think there was a misconception that we had ownership in Hagerty. So we’ve enjoyed a fabulous relationship and as a result of that, the opportunity came up recently for us to partner with them more closely by taking a minority shareholding. So, this is our initial shareholding and we’re very excited to be more closely associated in partnering with that or the group.

Okay. That’s actually very helpful. And then I guess the last question, and maybe, maybe it’s too soon to comment at length, but you mentioned the plans to establish a new Bermuda platform to some extent replace what CATCo had been doing. Do you imagine a sizing similar to what CATCo had been, or would the intent to be to start relatively smaller and build it up from there?

Yes. mark, probably first thing is it’s not a replacement for Markel CATCo, it’s a different strategy, different leadership team, obviously, run by Jed Rhoads, Barney Barnard and a number of their underwriting talent from the Markel regroup and it’s a different portfolio than what CATCo was writing. in terms of size, it’s going to be crawl, walk, run, we – success this year would be getting it off the ground and getting it started. And so we’ll – like, we do so many things at Markel Corporation, it’ll be a crawl, walk, run approach to it.

I guess with that clarification then, if it’s not particularly a replacement, just sort of a similar type of vehicle, would it be still in the plans to eventually resurrect or re-launch or whatever you might describe the existing CATCo platform with the current businesses being wound down?

I don’t think so. Obviously, we’ve learned a lot through – we have learned a lot through the difficulties that CATCo had and the impact it had on their investors, when we went out and talked to investors and we’ve talked to virtually all of the investors in CATCo, there was very little appetite to continue to invest in the CATCo product. So, we’re following the wishes of those investors in that, that product will go away.

Thanks very much for the insights, and good luck for the rest of the year.

Thank you.

Thank you.

Our next question comes from Phil Stefano of Deutsche Bank. Please go ahead.

Yes, thanks. Good morning. I guess just following on the last line of questions a little bit. I was hoping you could give us a sense of the number of employees in CATCo and kind of what their future looks like, understood that the new ILS retro fund is going to have a different leadership team, strategy, different portfolio. Can any of these employees move over to the new funds?

Yes. There’s about 20 folks at Markel CATCo. for the coming few years, job one will absolutely be the orderly runoff of CATCo and returning capital to the investors as soon as humanly possible. So that will be job one, but obviously, these people have experienced in all the back office functions and so forth that it takes to run a fund and the hope would be over time as CATCo winds down, they could assist in the new effort.

Okay. And going back to job one, any sense you can give us how we get from $3 billion to zero and assets under management over the next three years? Any sense around timing that you can help us understand that cadence?

I probably don’t have any numbers I can give you today. I mean, it really is in the hands of the seeding and what’s going to make it more difficult is the 2017 events, 2018 events that have acted differently than any events that we have seen previous to those two years. People are continuing to report development on the 2017 events and even more development on the Gebbie Events, the Michael Events. So, they’re going to be cautious. They’re going to be cautious in terms of releasing their collateral. Obviously, there’s a contractual language around how releases work. But I would just expect given the way 2017 and 2018 have developed, there’ll be a cautious approach from seeding, but we are obviously going to be working very hard with them to try to return that capital to the investors.

Got it. Okay. Switching gears and looking at reinsurance, the accident year X CAT loss ratio, picked up in the quarter and the explanation was that there was a change in the outwards reinsurance structure. Was there anything one time in nature in the second quarter with the change in reinsurance or is the mid-60s probably the right way to think about that attritional loss ratio up from the low-60s we saw recently?

Well, this sort of goes back to some comments I made last quarter about we are – we’re making some changes to our reinsurance program. Our goal has always been to keep as much of the premium that we write as possible. Working with our reinsurance partners, but we want to eat our own cooking. We have switched the type of coverage that the reinsurance group had from a quota share structure to an excess of loss structure in CAT protection. So, it’s going to take a couple quarters, I think for that to smooth out, just the round the accounting around it and earning of that seeded premium. So, it’s a little distorted at the moment and you add to the fact that CAT, CAT business is very seasonal. It’s going to probably take to the end of the year for that to settle down into more of a steady state.

And it’s Jeremy here. I would just add that we’ve been very focused on kind of managing volatility. So, in some ways, we might experience, given the change in the reinsurance program, a slightly higher attritional loss ratio. But we should do better when there’s more significant or severe losses. The other thing they can impact it a little bit is mix in the portfolio. So, to the extent that we write more casualty or specialty lines, the reinsurance versus property just as a mix that could have an impact on that attritional loss ratio as well.

Okay, got it. One more of really quick question. Was there anything in the Ogden in the quarter?

There’s nothing on Ogden. So, you may have heard the report that the rate change subsequent to the end of the period. In a move from minus 0.75 to minus 0.25, which was a little bit less than I think what most of the industry was expecting. And therefore, for us, A, it will be a third quarter event, and B, it will not be significant given that the modest sort of change. And as a reminder, we just continue to kind of writing UK Motor Treaty in 2014. So, we’ve been off that for quite some time.

Great. 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 very much for joining us, and we look forward to connecting with you next quarter. Be well.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.