Markel Group Inc.

Good morning and welcome to the Markel Group fourth quarter 2023 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 one again. 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 statement is included in the press release for our 2023 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 2023 results. The press release for our 2023 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 Gaynor, Chief Executive Officer. Please go ahead, sir.

Good morning, and welcome to the Markel Group 2023, your end conference call. This is indeed Tom Gaynor, and I serve as your CEO. I'm joined today by Jeremy Noble, the president of our insurance operations, and Brian Costanzo, our chief financial officer. Our plan this morning is to make just a few comments and then open the floor for your questions. Many years ago, I remember the great football coach John McKay saying, the most exciting place you can be is in the locker room at halftime when you're down 10 points. Well, make no mistake about it. We're down 10 points. almost literally and figuratively, from where we'd like to be in our insurance operations. Just like a good football team, though, winning remains the goal, but we need to do better. We share your disappointment in those results. We're also committed to taking the necessary actions to make them better. We're in the locker room right now. We're adjusting our game plans. We're clear-eyed about where we stand on the scoreboard and where we fell short. We're taking active steps to improve our positions. Jeremy will speak to our insurance engine in just a moment. He and his team continue to be hard at the task of understanding and quantifying areas of weakness as well as strengths and taking the necessary steps to improve results. We've made several significant management changes in the past year and taken actions such as withdrawing or reducing certain lines of business, reducing line sizes, increasing accountability, modifying incentive compensation arrangements, increasing the scope and scale for some of the proven winners in our insurance operations and decreasing or eliminating pockets with disappointing performance. The transition year of 2023 produced results well below our expectations, but I am confident that we've recognized the pieces of our insurance engine where we needed to make changes and that we're taking appropriate steps to make things better. Many areas in insurance produce wonderful results of which we should all be proud. Those results were offset and obscured by certain limited but meaningful pockets of underperformance. As such, the aggregate combined ratio came in higher than our original plans. Fortunately, while we did experience adverse development in the fourth quarter, we did indeed have positive development for the full year. We always operate with the core belief that we will always set our reserves at levels that we believe will prove to be more likely redundant than deficient. I'm proud of our insurance team and that despite the difficult year, we continue to live up to the standard of integrity and discipline in setting loss reserves. We've done so for years. We will continue to hold to that standard going forward. Jeremy will provide more details on the insurance results of 2023 in his comments. I also want to reinforce that the changes we made in 2023 and those that we continue to refine in 2024 and beyond will take time to show up in the financial statements. Every decision or action that we take in insurance takes at least a year to fully flow through our financial statements. We look forward to reporting better results in future periods as the actions we have taken take hold. Turning to some more positive and fun things to talk about, in 2023, we earned excellent results in our ventures and investment operations. Recurring investment income from dividends and interest rose 64% from $447 million to $735 million in 2023. Every engine at the Markel Group continued to produce cash, and that cash, along with maturities from our bond portfolio, was invested in higher-yielding fixed income instruments. Dividend income also rose due to net purchases in the equity portfolio and dividend increases. I think you can expect this positive trend to continue in 2024 with interest rates at current levels. We also repurchased 322,000 Markel Group shares in 2023 for $445 million compared to 233,000 shares for $291 million in 2022. Share repurchases continue to be a high priority use of capital for us at current prices. In our Markel Ventures operations, Top line revenues grew 5% from $4.8 billion to just a smidge under $5 billion. More importantly, operating income rose 35% from $325 million to $438 million, and EBITDA rose 24% from $506 million to $628 million. We did not make any new platform acquisitions in 2023. We were able to add to our VFC operations and increase our ownership stake in certain situations. We also completed an acquisition at Costa just after January 1 that will add to our 2024 results. We remain disciplined and thoughtful in our capital allocation decisions, and it is exciting to see our existing businesses find ways to grow. This is simply a phenomenal performance by the Ventures team. It reflects the ongoing maturity and development of the Markel Ventures businesses. I could not be more proud of the team from top to bottom as they continue to produce excellent results and do so in the context of the values of the Markel style. In our investment operations, we purchased over 300 million net of publicly traded equities, which met our longstanding four-part investment test. We earned a total equity return of 21.6% during the year, and I'm happy with those results. They were produced with our discipline fully intact. Among other things, the unrealized gain on our equity portfolio now stands at over $6 billion pre-tax. I'm not aware of many companies that enjoy a position such as that. Thank you all for your longstanding support of the Markel Group. I share your disappointment at some of the results within our insurance engine, and I'm confident that we are taking appropriate and necessary steps to improve those results. Meanwhile, given our diversification of the three-engine system and our excellent results, adventures, and positive investment results, we are making good economic progress at the Markel Group. While we continue to de-emphasize book value per share as the sole describer of economic progress around here, it's probably worth noting that book value per share went up over 17% in 2023. In the last five years, that it has increased to the compound annual growth rate of 11%, despite what we've described as some of the most challenging circumstances we've ever experienced. I am deeply optimistic that we are on track to make progress in 2024 and beyond. With that, I'll turn it over to Brian to update you on the 2023 numbers, and then to Jeremy for his review of our insurance operations. Following Jeremy's comments, we'll open the floor for questions.

Brian? Thank you, Tom, and good morning, everyone. I'm happy to be with you all this morning to discuss our 2023 results. As Tom mentioned, 2023 illustrated the diversity of our three-engine system. While our combined ratio result for the year is disappointing, Our ventures and investment engines had terrific years with EBITDA from Markel Ventures, the value of our investments, and our net investment income hitting record highs. With that, let's jump into the results. Starting out with our consolidated results, we reported net income to common shareholders of $2 billion in 2023 versus the net loss to common shareholders of $253 million in 2022, with the change largely attributed to the year-over-year swing and our public equity portfolio valuation. Comprehensive income to shareholders in 2023 was $2.3 billion versus a comprehensive loss to shareholders of $1.2 billion in 2022, driven most notably by the favorable swings in our fixed maturity and public equity portfolios. Net cash provided by operating activities was $2.8 billion in 2023 versus $2.7 billion in 2022, reflecting strong cash flows from each of our three operating engines. Total shareholders' equity stood at $15 billion at the end of 2023. As Tom mentioned earlier, we repurchased $445 million of Markel Group common stock this year under our outstanding share repurchase program compared to $291 million last year. Turning over to our underwriting operations, Gross written premiums within our underwriting operations grew 4% to $10.3 billion in 2023 compared to $9.8 billion in 2022, reflecting new business and more favorable rates across many product lines within our insurance segment, most notably our personal and property product lines. We saw lower premium volume within select domestic professional liability and general liability product lines where we adjusted writings in reaction to changes in market conditions and downward pressure on rates within certain classes, in particular within public DNO. Our consolidated combined ratio was 98% in 2023 versus 92% in 2022. The increase in the combined ratio was primarily driven by higher attritional loss ratios in 2023 on our general liability and professional liability product lines within our insurance segment, in reaction to increasing estimates of future loss cost trends. Prior year losses developed favorably by $39 million in 2023 versus $167 million in 2022. We experienced meaningful favorable loss reserve development across multiple product lines in 2023, most notably within our international professional liability products and our global property and marine and energy product lines within the insurance segments. This favorable development was largely offset by adverse development on our general liability product lines across both underwriting segments and adverse development on a discontinued portion of our public entity product line within our reinsurance segment. Jeremy will provide more insight on our loss development experience during his comments. Moving to our investment results. We reported net investment income of $735 million in 2023 versus $447 million last year, a 64% increase, as we reinvested maturing securities in our fixed income portfolio at higher interest rates. The total size of our fixed income portfolio also grew in alignment with our growth in reserves, given we generally match our insurance liabilities with highly rated fixed income securities of similar duration and currency. The largest contributor to our increase in net investment income is related to our cash and cash equivalents, where we have increased our allocation to money market funds to take advantage of the current interest rate environment. Net investment gains of $1.5 billion in 2023 reflect favorable market value movements, driving a return of 21.6% on our public equity portfolio during the year. This compares to net investment losses of $1.6 billion in 2022. As you've heard us say many times before, we focus on long-term investment performance, expecting variability in the equity markets and the timing of investment gains and losses from period to period. At the end of 2023, the fair value of our equity portfolio included free tax cumulative unrealized holding gains of $6.1 billion. Net unrealized investment gains included in other comprehensive income in 2023 were $307 million net of taxes compared to net unrealized investment losses of $1.2 billion net of taxes in 2022. 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 bond investments until maturity. and would generally expect unrealized holding gains and losses attributed to changes in interest rates to reverse in future periods as bonds mature. The cumulative amount of pre-tax unrealized losses on our bond portfolio was $560 million as of the end of 2023. We continue our longstanding practice of investing in the highest quality fixed income securities. As of December 31st, 97% of our fixed maturity portfolio was rated AA or better and there are no current or expected credit losses within the portfolio. Finally, moving over to our Markel Ventures segment, revenues from Markel Ventures increased 5% to just under $5 billion for 2023, up from $4.8 billion last year, reflecting higher prices and increased demand across several businesses, most notably within our construction services and equipment manufacturing businesses. EBITDA for Markel Ventures increased 24% to a record high of $628 million in 2023, up from $506 million in 2022. The increase was driven by increases in most all of our products businesses within the consumer and building products, equipment manufacturing, and transportation areas, driven by increased revenues and higher margins in 2023 versus 2022, as material and freight costs stabilize this year. With that, I'll turn it over to Jeremy to further discuss our insurance engine.