Markel Group Inc.

Good morning and welcome to the Markel Corporation first quarter 2020 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's 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, please press star, then two. 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 under the captions risk factors and safe harbor and cautionary statements in our most recent annual report on Form 10-K and quarterly report on Form 10-Q. We may also discuss certain non-GAAP financial measures in the call today. You can find the most directly comparable GAAP measures and a reconciliation to gaps for these measures in our most recent Form 10-Q, which can be found on our website at www.markell.com in the Investor Relations section. Please note this event is being recorded. I would now like to turn the conference over to Tom Gaynor, Co-Chief Executive Officer. Please go ahead.

Good morning, and thank you. Welcome to the Markell Corporation First Quarter Conference Call. My name is Tom Gaynor, and I'm joined today by my co-CEO, Richie Whitt, and our CFO, Jeremy Noble. While the nature of this call is financial, I want to start by thanking the people on the front lines. I want to thank the people who are manning our hospitals, our grocery stores, our utilities, and countless other essential elements of our lives. I want to thank those who may not be in the headlines, but who keep supply chains working. In many cases, The people of Markel provide many of the essential products and services I speak of, and I want to take this opportunity to thank them for doing so. At the beginning of the year, we started with excellent operational momentum in our diversified insurance, investment, and ventures operations. We entered the year with a conservative balance sheet marked by high-quality fixed income holdings, no near-term debt maturities, and a publicly traded equity portfolio that that stood at 69% of shareholders' equity. Those equity securities had a cost basis of $3.3 billion and a market capitalization of $7.6 billion at that time. In mid-March, conditions changed suddenly and dramatically. COVID-19-driven shutdowns of the economy started to take place. Since that time, COVID-19 has come to dominate just about every aspect of life, and Markel is no exception. Our focus has been and will continue to be on building Markel over the long term. That said, current conditions must be addressed. We're making daily and continuous decisions as we navigate through this historic time, and we'll do our best to keep you informed of our progress as we do so. During today's call, Jeremy will update you on our numbers. Richie will discuss conditions in our insurance operations, and I will return with comments about our investments and ventures operations. Following our brief comments, we will attempt to answer your questions. With that, Jeremy.

Thank you, Tom, and good morning, everyone. I'd be remiss if I didn't take a moment and echo Tom's sentiments of thanks and appreciation. First, the medical professionals, frontline workers, and public servants who are courageously and tirelessly taking care of our communities. I'm equally grateful to our employees around the globe. I've been impressed at how they are taking care of their families, customers, distribution partners, and each other during these unprecedented times. So again, thank you. As you heard from Tom and saw in our earnings announcement, our consolidated quarterly performance was heavily influenced by COVID-19 and the adverse impact it had on both the assets and liability sides of our balance sheet, the effects which can be seen in the results of our insurance and investment engines. Looking at our underwriting results, gross written premiums were $1.9 billion for the quarter compared to $1.7 billion in 2019, an increase of 13%. This increase is almost entirely due to our insurance segment, which reported gross written premiums of $1.4 billion, an increase of 19% compared to the 2019 period. This growth related primarily to increased writings within our professional liability and general liability product lines. Gross written premiums within our reinsurance segment were consistent with the 2019 period at just over $500 million. Retention of gross written premiums decreased to 85% from 87% in 2019, driven by lower retention within our reinsurance segment, resulting from purchases of additional outwards protection on our property product line as we seek to effectively manage capital and reduce volatility around catastrophe exposures. Current premiums increased 11% to $1.3 billion in 2020 due to higher written premium volume in our insurance segment. Our consolidated combined ratio for 2020 was 118 compared to 95 in 2019. Here's where we begin to see the effects of COVID-19 on the liability side of our balance sheet. During the quarter, we recognized our best estimate of pre-tax net losses and loss adjustment expenses of $325 million for COVID-19. These COVID-19 losses increased our consolidated combined ratio by 24 points. So if you do the simple math, the consolidated combined ratio prior to the effects of COVID-19 was 94. These reserves were established after detailed policy-level reviews, as well as a review of our enforced inwards and outwards reinsurance contracts. In those instances where we identified COVID-19 as the proximate cause of loss, we established loss reserves in the first quarter of 2020. Our losses from COVID-19 are primarily attributed to the business written within our international insurance operations and are primarily associated with coverages for event cancellation and business interruption losses in policies where no specific pandemic exclusions exist. Through the inherent uncertainty associated with our assumptions around COVID-19, which among other things include assumptions related to coverages, liability, reinsurance protection, duration, and loss mitigation factors, as well as the fact that the economic impacts of the pandemic continue to evolve, our estimates may be subject to a wide range of variability. Excluding the effects of COVID-19, our current action year loss ratio is higher year over year due to slightly higher attritional loss ratios in both our insurance and reinsurance segments. We have yet to reflect meaningful benefit from rate increases we've been achieving. With regards to prior year loss reserve development, consisting with our loss reserving philosophy, prior year loss reserves developed favorably by $104 million in the current quarter, compared to favorable prior year development of $70 million in the first three months of 2019. Next, I'll touch on our program services and ILS operations, both of which are included in results of other operations. Growth rate and premium volume from our state national program services operations was down 28 percent the prior year, driven by the runoff of one large program and the cancellation of an in-force book of policies related to another large program. which resulted in the one-time unfavorable premium adjustment. As a reminder, almost all of this gross written premium is seeded. Seeding fee revenues were up 4% from last year due to growth in the program premium volumes during 2019. Turning quickly to our ILS operations, our combined ILS operations have roughly $12.5 billion of net assets under management at the end of March 2020. Our Marshall Cacto operations are continuing to wind down as they worked to return investor capital as quickly and efficiently as possible. Revenues from our ILS operations were flat compared to prior year, with increases coming from our Nafila MGA operations being offset by decreases in management fees from Markel Catco due to lower assets under management and a further reduction in management fees charged on side pocket shares. Operating expenses from ILS decreased compared to the prior year, which is primarily due to fewer professional fees associated with the review an investigation in Markel Katko. Turning to our investment results, as I've mentioned in prior calls, given our long-term focus, variability in the timing of investment gains and losses is to be expected. To that point, here's where you see the COVID-19 impact on the asset side of our balance sheet. Net investment losses for the quarter were $1.7 billion, compared to net investment gains of $612 million last year, a year-over-year decline of $2.3 billion. Essentially, all of our net investment losses in 2020 were attributable to the decrease in the fair value of our equity portfolio during the period, as COVID-19 caused unprecedented volatility in the capital markets. We've continued to see volatility in the equity markets over the course of April, but have seen some of the equity price declines to reverse. With regards to net investment income, we reported $88 million in the first quarter of 2020, compared to $114 million a year ago. and the decline was mostly due to losses recognized on equity method investments. Net unrealized investment gains increased $66 million net of taxes during 2019, reflecting an increase in the fair value of our fixed maturity portfolio, resulting from declines in interest rates during the first quarter. Now I'll cover the results of Markel Ventures segment, which as a reminder has its results reported on a one-month lag. Revenues for Markel Ventures increased to $511 million for 2020, compared to $455 million last year, an increase of 12%. The increase in revenues was primarily related to the acquisition of VSC Fire and Security, which closed during the fourth quarter of 2019, and to a lesser extent, an overall increase in our consumer and building products businesses. EBITDA from Markel Ventures was $67 million for 2020, compared to $55 million last year, an increase of 23%, reflecting improved operating results within one of our consumer and building products businesses, and greater EBITDA within our transportation-related products businesses, as well as the acquisition of VFC Fire and Security. Looking at our consolidated results for the year, our effective tax rate is 21% for the first three months of 2020 and 2019. We reported a net loss to shareholders of $1.4 billion for 2020 compared to net income to shareholders of $576 million a year ago. Driven by the net loss, Comprehensive loss to shareholders for the first quarter was also $1.4 billion compared to comprehensive income of $732 million in 2019. And finally, I'll make a few comments on cash flows, capital, and our balance sheet. Fed cash provided by operating activities was $66 million in 2020 compared to $19 million for 2019. Operating cash flows for 2020 reflected higher premium collections as we've seen strong growth in our insurance segment over the past several quarters. The increase also reflects the effects of lower claim settlement activity in both our insurance and reinsurance segments. Marshall offsetting strong cash flow activity in the first quarter was an adverse impact to cash flows for the return of collateral held for unearned premiums on a large program within our program services business that was canceled in the period. Invested assets of the holding company were $3.3 billion at the end of March, compared to $4 billion at the end of the year. The decrease in holding company invested assets was due to a decrease in the fair value of our equity portfolio, again arising from COVID-19, its impacts. Recognizing the importance of liquidity in times of uncertainty, we've taken several actions, including retaining cash proceeds from the maturity of short-term investments and fixed maturities, pausing our purchases of equity securities, and in certain instances, selling equity holdings, suspending repurchases of our shares, and focusing on expense reductions across the company, We continue to maintain a fixed maturity portfolio comprised of high credit quality investment grade securities with an average rating of AA. Our debt to total capital ratio at the end of March was 27% in line with our target range. We have no unsecured senior debts maturing in the next 24 months. We believe we are well positioned to meet our ongoing capital and liquidity needs, including the cash required to complete our pending acquisition of Lansing Building Products. Total shareholders' equity stood at $9.7 billion at the end of March compared to $11.1 billion at December 31st. So in summary, the unprecedented events surrounding COVID-19 certainly impacted our quarterly results. However, the actions we've taken over the years to build a diverse and resilient organization will help us navigate through the current uncertainty arising from this pandemic. With that, I will turn it over to Richie to talk more about our insurance businesses.