Good morning, and welcome to the Markel Corporation Third Quarter 2022 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [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 our most recent annual report on Form 10-K and quarterly report on Form 10-Q, including under the captions, Risk Factors and Safe Harbor and Cautionary statement. We may 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.markel.com in 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 to the Markel Corporation third quarter conference call. This is indeed 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. They will update you on our overall financial results and our insurance operations in just a minute. But before they do, and as they say in the news business, don't swallow the headline. Well, here's the headline. Things are going very well at Markel. I'm delighted to share these results with you full stop. Now I 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 you that might help you enjoy the same sense of progress and optimism that I have. First, our insurance operations are solidly profitable and growing at the same time. Richie and Jeremy will give you more numbers and details on this. But from my point of view, during 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 is fantastic. I am so proud of and grateful for our insurance operations and the results they are posting. We've had some bumps along the way and 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 also think these results bode well for the future. Second, our reinsurance operations posted solid profitability in the face of all…

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. It's events like Ian that remind us of this virtue and where we must follow through. I'm 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 of claims to get people back on their feet with the supply of building materials to help restore, Markel is actively working to improve the situation, and our thoughts continue to be with people of 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 remain focused on building long-term shareholder value. Overall, it's been a pretty solid first three quarters of the year. Looking first to our underwriting results, gross written premiums surpassed $7.5 billion for the first nine months of 2022 compared to $6.3 billion in 2021, an increase of 19%. Our 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 continue 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 included $70 million of net losses attributed to Hurricane Ian, and $35 million attributed to the…

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 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 passed $7.5 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, the development of new products and the on-boarding 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 in the most recent accident years, we are being cautious about realizing these potential benefits until the impact from various forms of inflation and core processing delays are more fully understood. Now, I'll discuss our year-to-date results within our insurance…

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 at Markel opening comments. I think the best I can do at this point is just to open the floor for questions. So with that, Regina?

We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from the line of Mark Hughes with Truist. Please go ahead.

Yes. I wonder what you can say in terms of signals you're getting about the economy when you look at your insurance operations, also the Ventures, you say construction is doing pretty well and curious whether you're seeing any kind of signs of things may be slowing?

Yes. Thanks Mark. It is an 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'll tell you is, it's hard and it's challenging. And every single business is dealing with labor issues, supply issues and inflationary pressures. But at the same time, we continue to increase prices in response to increased cost, and there's plenty of business to be done. So it keeps on keeping on.

Very good. I think when you look at the Reinsurance segment, obviously, post property is hardening up. Is that spilling over into other lines? And is that going to create opportunity within reinsurance or insurance in the Insurance segment as well?

Mark, it's Jeremy. Maybe I'll start on that. I think you're right to point out, and there's property is certainly part of the story. I think marine and aviation lines because of this year's events are also part of the story. So, we see it if we're on the table relative to our outworks programs, and we see where we're at the table from our inwards programs. The conversations are definitely a little more intense. And I think capacity is a little more scarce, and I think that is creating a little bit of a firming opportunity. So I would anticipate that, that has broader implications across casualty and specialty lines as well. So, we're going to see you 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 base is working in the reinsurance space. And I would say it's certainly hardening more right now in the reinsurance space.

Can really think about your growth in insurance, the 21% in written this quarter? I hear your description of in pockets of price competition, you've been careful about inflation. You also say the pricing increases are moderating, but you're still seeing -- in looking at the written premium growth that you're seeing a lot of good opportunity. Any way to kind of square all of that? The optimism in the P&L versus the caution in the language and description here?

I think the way to square it is, is your right, Mark, things are good and language in the way we speak, we're inherently conservative people. We always have been. We always will be. So we never want to take things for granted. We never want to surge good things, but things are pretty good.

And Mark, maybe, Jeremy, I'll add to that. I mean I think 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, a multi-distribution platform. We are achieving rate. We got new product innovation. So that's allowing us to grow, but what we're laser focused on is growing profitably. So 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 discipline and the importance of knowing when we got to push away from the table or put the bend down with the opportunity for us to grow at present as well as what I think that portends for future quarters. And that's what we've been hard at work at.

Our next question will come from the line of Mark Dwelle with RBC Capital Markets. Please go ahead.

Let me start with an accounting question. The $53.4 million of reserve release that related to CATCo. Am I 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?

Mark, it's Jeremy. Well, you make a great account. So yes, you're exactly right. It's really just geography. So, that is a straight pass-through any. We continue to wind down the reserves. We continue to execute computations where we can, where there are savings that passes through to the benefit of the original investors. We see that the sort of the benefit come through as favorable in the other expenses. The offset is a non-controlling interest kind of below the line. Just be aware of that.

Right. Okay. And my old accounting professor would be proud that I retained any of it. So anyway, the second question that I have and this may be probably for Jeremy and Richie. I mean you've talked about your increasing caution on the reserving and on the loss picks. Yet, we've got some pretty decent pricing still, and we obviously have inflation. Can you just 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? And 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?

Yes, Mark, I'll start and maybe Rich will jump in. I think that is a good way to think and won't necessarily get into numbers or certainly a line by line of 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 an effect of acting like rate to a certain degree as well. So, that is why we are incredibly focused on rate adequacy. If we were in an elevated 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, focused on reacting to bad news, if you will, very quickly and taking a much more measured view to good news. That's anywhere over time where we are in a cycle, but I think that's even more so the case now. So feel like despite a patio environment, right, we can take those actions that Richie and I were 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, a combined 90 year but that's a pretty good place, I think, for us to be at this stage.

Yes. I'll just add a -- 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, everybody. I mean, Tom and I have seen this kind of inflation, but a lot of the rest of the people around here have not. So, it's safety first at Markel, and it always has been that way in terms of the reserves. And we'll -- we're more than happy to make sure the reserves are at the confidence level that we want. And if that means there's potentially some reserve decreases 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 two maybe follow-up questions directly to that point. So if you're kind of at conservative plus in terms of thinking about accident year picks and reserving, what are the signposts you're looking for that would move you back to just merely conservative? That would be the first question. And then the second, I mean, as you weigh up the pricing environment now, the inflationary trends that you're seeing, would it still be the case that more likely than not accident year margins would improve next year? Or you're not willing to go that far?

I think it's hard to say whether things -- accident market -- margins improve because we got a lot of unknown variables, right? We don't know what the rate increases are going to be next year, and we also don't know what the true rate of inflation is. I know you're going to hate this answer, but the true thing that we need to be able to start potentially reducing our loss picks and increasing prior year releases is time. 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 just, Mark, with some formal accounting comments here. You remember the movie, My Cousin Vinny, was a scene in there where the character that was played by Joe Pesci 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 month to back up that bet." You asked them to show them the cash of the states that they wanted to be for. And of course, they didn't happen. And it was a recurring risk it came back and they had a big lot of money and he says, "Well, how do I know that isn't just a bunch of ones for the 20 wrapped around it and turn that's exactly what it was." Well, the good news when we're debating and trying to think about how this reserve -- how the reserves might develop over time, remember, we did collect the premiums upfront. We do have the cash for what we're talking about. Now we'll 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 in the belief that we want our reserves to be more likely to be redundant and efficient. And we have the cash while we're waiting for, as Richard said, time, just to say to claim the level, it's done, we know. In the meantime, economically, we're earning the returns from our capital.

Okay. I think that's the first in 20 years of doing this. That's the first My Cousin Vinny reference I've ever gotten in response to a question that I've asked. But that way, I won't have to ask you whether -- if Markel is a pizza, if you're a New York style or a Chicago style, I think you've shown your colors on that one.

I don't know. I know what we're eating for lunch now.

[Operator Instructions] Our next question will come from the line of John Fox with Fenimore Asset Management.

Yes. First, congratulations on the reinsurance results. I have a number of questions for Tom. Tom, you've been holding on to about $2 billion of short-term investments for quite some time and another $3 billion of cash. And there's 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 and increase the yield going forward?

Well, the good news is, while there's a lot of chatter and conversation about that issue over the last year or so. With hindsight, in retrospect, it looks in 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, what we'll do is to continue to invest in a methodical and disciplined way. I'm not going to chuck it into the market all at once. We'll do the same thing we always do, just steady, steady, steady, steady, steady, incremental, incremental, incremental, iterate, iterate, iterate to a better return. But avenue market forecast, I have no crystal ball. Well, we're going the month work.

Yes. I guess billion of short-term investments, right? Could that be $1.2 billion and $600 million of corporates where you could earn 5%, 6% on pretty short duration, like are you thinking about that? Or we're moving to 4%, 4.5% on short term, and that's okay.

Yes. It's not awful, especially compared to what it had.

That's very clear.

Yes, John, I can call a conversation with you many, many years ago where you made the comment about Mark House. 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 might pace it a little differently than you would if our roles will reverse, but we're doing the same thing.

Your answer is very clear. The other point on investment income and sometimes on these calls, we get an interesting lecture on account. And I would say that -- and I like your reaction to this. I think your net investment income is actually doing better than you suggested. If I read the Q correctly, the $108 million of net investment income includes about $5 million of marks from Hagerty.

Yes, I think it's actually more than that. So the equity method investing and believe me, that's one of those in that starts around here with -- I used to be an accountant and those conversations ever. So, yes, both -- 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 million or $50 million, but it was one of those two numbers. And I think we've recognized cumulative gains and losses of well over $100 million each way of gains and loss over time, depending on the mark-to-market that quarter. It's the same thing that happened when we grow to the credit default swap that we end up having a wonderful experience with long time ago. The quarterly swings that come through equity method accounting do indeed obscure what's really happening in fundamental economics. So you're reading the queue right, and that's why I used the new term of recurring, recurring net investment income this year. I think through the first nine months, the number is about $50 million in total on the equity method things. If you took that out of the mix and with the recurring, recurring net investment income, it is going up at a faster rate than what was reported in this quarter's results.

John, it's Jeremy. Just to piggyback, John, here just to piggyback off Tom's comments. All of our equity method investments are included in that line item. So it's not just Hagerty. So, I want to make that point. And then Tom is exactly right. The year-over-year shift is $50 million. So instead of on a nine-month basis being down $10 million, we'll be up $40 million.

Right. That's my point, right.

Yes. Exactly.

The recurring investment income from the portfolio is growing and increasing the return on equity. Is that the right way to think about it?

Yes.

And to add insult to injury on the Hagerty piece, it's worth about $0.5 billion more than what's on the financial statements, right?

That is correct.

Okay. And then...

Yes, so call it $0.5 billion. The only thing we've ever recognized is our losses.

Right. Okay. And then, Tom, final question for you. On the venture side, if I look at the products, I take the products revenue and subtracted expenses, it's about a 1% margin, which is, I'm sure, not reflecting a reality. Could you talk about anything that went on there in the third quarter? Is there anything unusual? Or is that seasonality?

Yes. I don't know. I know one of the things that would be going on in terms of the EBITDA profitability of the book and the set of businesses is to the extent that we have distribution businesses, those are high volume, low margin, but a wonderful return on capital. And the mix is skewing a bit that way at the moment, but I have to look at and think about the exact thing you're asking about, don't know.

Okay. Great. And then, Richie, for you. Typically, ILS has had a big fourth quarter. That's been their best quarter for profitability, I guess as things get trued up from the investment year. Do you expect that to happen again this year? Or with the hurricane? Is that off the table?

I guess I'd have to say, John, I don't know. The fourth quarter is usually when you look hard at the side pockets and see if they can be released and that releases trapped fees. I don't know where that will stand this year just simply because of -- like you say, Ian, I think there's 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 time that you do capital raising. So I guess, sorry, the answer is I don't know.

Okay. That's fine. I appreciate it.

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. Be well. We'll 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.