Markel Group Inc.

Good morning and welcome to the Markell Group second quarter 2026 conference call. All participants will be in a 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 touchstone phone. To withdraw your question, please press star then one again. During the call today, we 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 2026 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 statements 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 2026 results or in our most recent Form 10Q. The press release for our first quarter 2026 results as well as our Form 10K and Form 10Q 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.

Thank you, Matt, and good morning, and welcome to our second quarter conference call. We welcome this opportunity to update you on our current and long-term performance and to answer your questions. As we've long stated, at Martell, we operate with the dual time horizon of forever and right now. I believe that the movie Field of Dreams got it right. The central premise of the film stated, if you build it, They will come. We think that is true and we continue to work on building the system designed to relentlessly compound your capital. We are building the value of Markel and doing so in a way that rewards you, our shareholders, along with our customers and associates. That's the forever scorecard. The right now performance indicates how the journey continues to progress step by step. The case of the right now We look at adjusted operating income, which doesn't include many adjustments. It's simply gap operating income excluding the short-term swings in public equity markets and amortization expenses. Equities often swing wildly quarter to quarter. Any short-term metric that includes those swings is noisy and doesn't do a very good job of describing our progress. Over five-year periods So over this timeframe, we focus on operating income, which includes our equity returns. The adjusted operating income of our business, plus growth in our public equity portfolio, drives intrinsic value. Over time, we believe our stock price should track that intrinsic value. But first, the right now. In the second quarter of this year, our reorganized and refocused insurance business continued to improve profitability Thank you for joining us. Finally, in our financial business, we acknowledged last quarter that within our state and national business, we experienced a collateral shortfall relative to our total exposure to a particular capacity provider currently in bankruptcy. This quarter, after extensive actuarial work, including the engagement of an outside third party, we recognized a reserve of $205 million. I believe this event was driven more by the unique and unfortunate confluence of events including the nature of the business written, the jurisdictions involved, and the pace at which losses develop. This particular business involved began in 2012 and we ceased writing on these programs in 2021. This marks the first substantial credit loss in state nationals over a 40-year history. Per our practice, we've made what we believe is a conservative estimate of our ultimate liability consistent with our overall reserving philosophy. As is always the case at Markel, we do our best to recognize and report bad news quickly and let good news develop over time. Today's action is in keeping with that philosophy. Turning to the forever, we focus on a five-year time horizon to measure and compensate the senior management team. We think that five-year timeframe matches up with a meaningful measurement of economic progress For the last five years ending in June 2026, average annual operating income was $2.5 billion compared to $1.2 billion in the previous five-year period for a compound annual growth rate of 15%. We've been repurchasing our stock at an increasing rate and have reduced the total outstanding shares from $13.7 million to $12.4 million, a reduction of just under 10% over the last five years. On a per-share basis, Average operating income per share was $188.94 for the last five years, ending in June 2026, compared to $88.99 for the previous five-year period, for a compound annual growth rate of 16%. The average shareholder's equity used to produce these results grew by only 9% over the same period. That's significant earnings growth delivered in a capital-efficient way. When things go bump in the night, and they do, we can absorb it. When opportunities aligned with our values arise, we can pursue them. Our businesses continue to generate cash, which fuels the ongoing capital allocation activities. Over the last few years, the single largest use of capital has been the repurchasing of our own chairs. During the second quarter, We have now repurchased more than $2 billion since the beginning of 2022. We continue to believe that, at current prices and relative to the current set of alternatives, Markel shares represent the highest and best use of capital, and we're acting accordingly. I would also point out that we funded these repurchases through earnings. We are not leveraging up or borrowing money. As these repurchases continue to take place at a discount to our estimate of intrinsic value, that should continue to increase the value of each share of Markel. Brian will now share some financial highlights and details from the first half of 2026, and then Simon will provide an update about our insurance operations.

Thank you, Tom, and good morning, everyone. First, Markel Group's consolidated results for the second quarter of 2026. Operating revenues, which exclude net investment gains, were $4 billion for the quarter and $7.6 billion for the first six months. Both periods were flat to comparable periods a year ago. Operating income, which includes net investment gains, Thank you for joining us. for the first six months of 2026, adjusted operating income was $934 million versus $1.1 billion a year ago. The prior two quarters served as a good illustration of why we use longer-term views of operating income performance. As net investment gains were $1.2 billion for the quarter, More than reversing the investment losses from the first quarter. For the first six months of 2026, net investment gains totaled $440 million versus $431 million a year ago. Net income to common shareholders was $1.2 billion or $93 per diluted share for the quarter versus $631 million or $50 per diluted share a year ago. For the first six months of 2026, Net income to common shareholders was $957 million or $74 per diluted share versus $753 million or $62 per diluted share a year ago. Moving now to our Markel Insurance business. Underwriting gross written premiums were $2.4 billion for the quarter versus $2.8 billion in the second quarter of 2025. For the first six months of 2026, Underwriting gross written premiums were $4.6 billion versus $5.6 billion a year ago. In both periods, growth was 10% when excluding the impact of exiting our global reinsurance division and the transition of our Hagerty program to a fronting model. Net earned premiums were down 3% for both the quarter and the first six months of this year. The combined ratio was 93% for the quarter compared to 97% in the second quarter of 2025. The improvement was driven by more favorable prior year reserve development and a slightly lower expense ratio partially offset by 41 million or two points of current year catastrophe losses related to the Middle East conflict. For the first six months of 2026, the combined ratio was 93% versus 96% a year ago and included 76 million or two points of Middle East conflict losses while the prior year period included 61 million or one and a half points of losses from the California wildfires. Adjusted operating income was 376 million for the quarter versus 270 million in the second quarter of 2025. For the first six months of 2026, adjusted operating income was 746 million versus $552 million a year ago. In both periods, the increases were driven by improved underwriting profits and higher net investment income. Total operating income, which includes net investment gains within our insurance operations for the first half of this year, was $1.2 billion, putting us on pace to achieve double-digit return on equity for the full year. Looking now at the ongoing divisions within our insurance operations. Within our international division, gross written premiums were $890 million, up 31% versus the second quarter of 2025, with growth across the division, led by marine and energy, general liability, and professional liability lines. The combined ratio was 82% compared to 78% a year ago, with the current quarter including six points of losses from the Middle East conflict. For our U.S. wholesale and specialty division, Gross written premiums were $799 million, down 4% versus the second quarter of 2025, driven by intentional contraction in binding contractors and casualty lines and a softening property rate environment, partially offset by growth in professional liability lines. The combined ratio improved to 97% from 102% a year ago, reflecting lower loss and expense ratios from our continued underwriting actions. Within our Programs and Solutions Division, underwriting gross written premiums were $717 million, down 27% from the second quarter of 2025. This reduction was driven by the shift of our Hagerty program to a pure fronting model. Excluding that impact, gross written premiums grew by 6%, led by our delegated programs and personal lines businesses. The combined ratio was 94%, up from 91% a year ago, with the increase reflecting a higher current accident-year loss ratio in our personal umbrella line and within certain delegated programs. Turning now to our consolidated investment portfolio. Net investment income totaled $256 million for the quarter, up 11% from the second quarter of 2025, reflecting a higher average book yield and an increase in the average balances within our fixed maturity portfolio. For the first six months of 2026, net investment income was $512 million, up 10% from a year ago. The fair value of our public equity holdings increased to $13.5 billion at quarter end, up from $12.3 billion at the end of the first quarter, which represents a 10% increase. For the first six months, the portfolio increased by 4%. Our cumulative pre-tax unrealized gain on our equity holdings at the end of the period was $9.3 billion. Moving now to our industrial segment. Revenue was $1 billion for the quarter, a 2% increase versus the second quarter of 2025, driven by the contribution from a bolt-on acquisition in December of 2025. Organic revenue was flat, as higher sales volume of our pre-tax concrete products and fire safety services were offset by lower sales volume on our car hauling equipment due to a continued down cycle in demand for that industry. For the first six months of 2026, revenue was $1.9 billion, up 4% from a year ago, with organic revenue growth of 2%. Adjusted operating income was $75 million for the quarter versus $105 million in the second quarter of 2025, primarily reflecting tighter margins along with softer demand within our car hauling equipment business. For the first six months of 2026, adjusted operating income was $125 million versus $162 million in the prior year. Moving to our financial segment, revenue was $171 million for the quarter versus $173 million in the second quarter of 2025. For the first six months of 2026, Revenue was $333 million versus $351 million a year ago with the six-month period last year including non-recurring gains of $41 million from our investment in Velocity and the sale of its MGA operations. The financial segment recorded an adjusted operating loss of $149 million for the quarter versus income of $78 million a year ago. For the first six months of 2026, The segment recorded an adjusted operating loss of $113 million versus income of $158 million a year ago. Both periods were impacted by the $205 million bad debt charge within our State National Programs Unit in the second quarter of this year. Moving now to the consumer and other segments. Revenue was $552 million for the quarter. Thank you for joining us. Thank you for joining us. We direct capital to wherever we see the best long-term return. Some notes from this quarter. Within public equities, Net purchases were nominal, totaling $21 million. Acquisitions totaled $24 million of small downstream deals within our existing companies. We also paid $74 million to increase our ownership stake in our existing businesses. Regarding share repurchases, we repurchased $237 million in shares during the quarter and $371 million year-to-date. Reducing our share count at the end of the second quarter to 12.4 million shares. With that, I will turn the call over to Simon.

Thank you, Brian, and good morning, everyone. This time last year, I reported on a quarter where our combined ratio stood in the high 90s. Today, I'm pleased to report a 93% combined ratio for Markel Insurance for the fourth quarter in a row. Improving our performance and generating greater levels of consistency Thank you very much. On the surface, reporting four quarters in a row of a low 90s combined ratio may appear a little boring. In that regard, long may boring continue. However, under the surface, the level of change that has been implemented to set Markel back on the path of being a leading specialty insurer has been significant. Two simple principles sit at the core of everything we have done. First, be obsessed with our customers. Put our clients at the heart of all we do and make decisions as close to them as possible. The outcome of the work done so far is as follows. Marco Insurance now consists of three divisions, below which sit 14 business units, each with a clearly identified leader. Each business unit leader has committed to delivering a financial plan for 2026 and a strategic plan over the next five years. The reporting lines of thousands of people, along with all our financial reporting and management information, have been aligned to the new structure. Our results have improved and become more consistent, but even more importantly, our clients now describe our new setup as being simpler to access and quicker to make decisions. The leaders of our business units relish the challenge of building great businesses that will endure over the long term. These are critical foundations but we are now focused on the next year of progress. At the heart of that focus lies execution of our financial and strategic plans and the investments that we are making in our operations and technology. AI provides Markel Insurance with tools that allow us to reimagine how work gets done. We have asked all of our businesses how we can get better products in front of our customers much faster. This involves looking at every aspect of the business process end to end and having AI support and a mentor. So far, we see the deployment of AI show up at three levels. First, building a new strategic business unit from scratch. Back in March of this year, we partnered with Bain & Co and kicked off a project to reimagine how to underwrite and service hard-to-place US casualty risks with a new business model, where this model would be built with market-leading AI tools The design and built by Markel and Bain experts. We're able to combine the team's underwriting knowledge gained over decades and the data we have amassed during that time. A new business unit named Cortex was launched within our wholesale and specialty division last week, just a few months after we started the process. We have moved quickly, learned a lot, and believe that we have created something of genuine value in an area of the market where Markel has a right to win. Second, rewiring a class of business using agentic AI. Over the past 12 months, we've comprehensively rewired six classes of business across both our U.S. and international operations, totaling over 500 million of existing GWP. We've partnered with Harvey AI to do this, and the impact of applying agentic AI to sophisticated specialty underwriting is significant. For example, the reduction in time to have an initial risk assessment in front of an underwriter has fallen by between 50 and 90%, depending on the line of business, and accuracy levels are above 90% in all cases. This frees underwriters to focus on decision-making, negotiation, and getting quotes out of the door. The result is higher levels of better quality business, with the WI portfolio in London growing by 50% in the years since we deployed Harvey. Third, introducing AI agents at the business process level. Our AI accelerator fund was launched in February of this year, with money made available to the best ideas stemming from the wider business. In total, we chose nine ideas, all of which were developed and put into production during the single month of April. The ideas range from a new racing engine in our equine business that makes initial quotes available to our equine customers in seconds, to an agent that vastly increases our ability to respond to the fast-moving marine war market. to the WinSight tool, which analyzes the vast amount of data made available by our brokers on upcoming renewals and prioritizes the opportunities so that we can concentrate on those we are most likely to win. The accelerator fund promotes ground-up ideas in our decentralized model. We are increasingly confident in our deployment of AI and are committed to utilizing it to transform our business. However, AI is only beneficial if it improves our service to customers, while generating returns on capital over time. So it is the business unit leaders who determine how best to deploy the technology. Leadership plays its part by consistently challenging these leaders to think differently and by sharing great ideas from other parts of Markel. Not all of our technology investment is being made in AI. There are some areas where building strong and durable core infrastructure is a critical step to ensuring we can make the most of AI further down the line. Examples of this work include deploying claims center across our US operations earlier in 2026. The investment in policy center is our core system for the personal lines business unit and the overhaul of our data environment in our international operations over the past three years. These investments in our core infrastructure provide the necessary foundation that enables future AI initiatives to enhance our overall offering and will ensure that we can scale market insurance for years to come. Overall, Thank you. Thank you. Thank you. Sadly, football may not be coming home this year, but maybe, just maybe, specialty insurance is. These are exciting times at Markell Insurance. And with that, I'll pass you back to Tom.

Thank you, Simon. Indeed, these are exciting times at Markell, and we look forward to answering your questions. Matt, if you'd be so kind as to open the floor.

We will now begin the question and answer session. Please limit yourself to one question and one follow-up. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, please stick up your handset before pressing the keys. To withdraw your question, please press star then 1 again. At this time, we will pause momentarily to assemble our roster. Your first question comes from the line of Tracy Benjiji with Wolf Research. Tracy, your line is open. Please go ahead.

Thank you. When the third-party actuarial team that came in to assess the counterparty credit risk shortfall at the bankrupt reinsurer, it seems like that review was limited to just one counterparty at State National. Or did the third party also review the adequacy of collateral behind all of your unrated reinsurance partners for backing much larger liabilities? And if you could comment on the general health of your collateral backings Reinsurance Counterparties. Thank you.

Thank you. I appreciate the question. That specific engagement was for the specific contract where we thought we had some issues and we wanted to nail that down to the best of our abilities. As you might imagine, we, as managers doing our duty, are looking at everything at the same time, but the specific third party was engaged just for that topic.

Right. So can you comment about Your view of the general health of collateral backing all of your reinsurance counterparties, particularly those that are not rated?

Yes, how could you do so? We have every confidence that they are the best in class on doing so and continue to believe that's the case.

Okay. Looking at your reserve development, what gave you comfort to release workers' comp reserves for recent acts in the air? And on the topic of reserves, as we sit here today halfway through the year, is the conclusion of your actual versus expected analysis support your guide of favorable development up to 5% or $800 million during 2026?

Yeah, let me ask Brian to comment on that. Sure, yes. Specifically on workers' comp, I mean, that has behaved very well, I think, across the industry in general. But for us in particular, from an A versus E standpoint, you know, we've been holding a fair amount of margin there for a while. We're starting to release some of that as the A versus E continues to come in and trend favorably. Overall, on the reserve side, what you're seeing us do is react to exactly those A versus E trends that we're seeing over multiple periods. Our releases are concentrated in first-party lines in the U.S. That would be our property, our inland marine, and our personal lines, our EMS homeowner's book, along with many lines in our international book that have performed very, very well and behaved very well from a reserving standpoint. On the casualty side, casualty and professional, that's a moral hold the line. Very modest kind of adverse development. It's kind of been trending as we would have expected on the whole, and that's kind of how we've been reacting there. One other reminder on the casualty side, we do have a stock loss reinsurance treaty in place for action years 2019 and forward that impacts kind of our analysis when we set the reserving basis.

Thank you. Your next question comes from the line of Andrew Anderson with Jeffries. Andrew, your line is open. Please go ahead.

Hey, good morning. Maybe back on the state national matter. I just want to make sure I kind of have the sequence of events correct. I think at year end, this relationship was nearly fully collateralized In one queue, you did increase the loss ratio of this business a little bit. At the same time, you engaged a third-party firm who subsequently, I think, significantly increased this loss estimate, almost doubled it. So maybe what did the third-party actuarial firm discover that was beyond what you saw in the first quarter? And why not engage the firm to review reserve adequacy across the broader state national platform?

I'm going to ask Brian to respond to that.

Yeah. Andrew, I think your fact pattern is generally correct. You know, as we've said at year end, we have been increasing. We had adequate collateral. There was a small deficiency based on our actuarial view at the end of the first quarter. What we did was we went back and got more granular data on this program that we did not have available. We did our own ground-up actuarial review internally. We engaged the third party. And then we also looked at our kind of insurance book of primary casualty that we have written for a long time. I have a lot of credible data there. used all of those data points to kind of analyze the claims trend on what we were seeing in that series of programs, five different programs that kind of passed through to this counterparty and then made a judgment based on our historical reserving philosophy to set a level that we believe is more likely redundant than deficient.

Okay. It just seems that this increase this quarter, it is a Pretty large percentage of state and national surplus, which is, of course, part of the broader Markel Group, which is very well capitalized. I'm just surprised to see such a big change after 1Q. Are you able to share what type of business this was related to and what type of lines?

Yeah, it was mostly primary habitational casualty business across these programs. There was a little bit of excess casualty in there, but that was less than 10%. concentrated in a handful of states.

Okay. Thank you. And maybe on the core book, if I look at total insurance, XCAT, XPUID loss ratios, it's about 60% in the first quarter and then about 63.5% in the second quarter. Maybe you could help us think about the trajectory throughout the rest of the year and maybe what's the right run rate for the ex-CAT, ex-PYD loss ratio.

Yeah, I would say where we booked in the second quarter is kind of where we feel things are. The main increase driver was we did increase our loss pick on our personal umbrella line. Okay, and last one.

Within the financial segment on the combined ratio, it does look like accident year losses were up year over year. Is that related to the loss pick adjustment that you had just mentioned or something else within the financial segment accident year combined ratio?

No, the underwriting piece of the financial segment is related to the collateral protection line that state national rights, so that's their other business. We have seen a little bit of heightened losses there, particularly in the first quarter. Second quarter was significantly better. That is a very, very short tail line. So we have real-time indicators. There's not a lot of IV&R that's held there, so it's really moving on kind of actual incurred losses that are coming through from the repossession of autos.

Thank you. Your next question comes from the line of Maxwell Pritchard with Truist. Maxwell, your line is open. Please go ahead.

Yeah, thank you. Good morning. I'm calling in from RQs. What are your observations around pricing and casualty lines? You mentioned last quarter claims trending in the low double digits. Where would you say pricing is relative to that? And have you seen any incremental competition in those lines since last quarter?

Thanks, Maxwell. Simon here. I would say in casualty, what we're seeing across the whole U.S. casualty on average is probably claims trending in the low double-digit kind of numbers, maybe 10%, 12%, something of that nature. Rates on average are probably slightly below that, so there's a divergence, I think, between where the average market is getting rate at maybe 10%, 9% I'd say and then that low double digit on the trend. So that's the average. What we've been doing is we've been really focused on that bucket business in terms of managing the cycle because those average numbers over a period of time just don't work. I mean that's clear to us. So the key actions that we've been taking and I've mentioned this a couple of times before, we've been reducing our line sizes across different risks where we're on. So What was typically a $10 million line would now be more like a $5 million line, for example. So that's actually number one. The second really important action we've been taking is to reduce our exposure to construction casualty, which has caused a significant chunk of the losses out of average, I'd say, in those numbers. And we continue to focus on the areas. The new business unit that I described earlier, to focus on the hard-to-place U.S. casualty risks, we feel as though We can underwrite risk in a way that is better quality than the average market in that particular area, which is the reason that we've gone after it. So we've tried to focus our attention in areas where we believe that we can get weight, which is better than trend. We'll see how that plays out. But, you know, we are more in a defensive mode in that U.S. casualty market at the moment. And we are walking away from areas which are really causing the majority of losses to our book. and we probably accelerated that in the first half of this year.

Got it. That's helpful. Thank you. And then I guess switching gears to property, how do you expect rates to trend in the back half of the year? Of course, it'll depend on storm season, but as we stand here now, are you seeing carriers reach a floor and seeing rates stabilize or do you expect some incremental pressure there as well?

Well, as you say, the first half of this year, it's been very aggressive, the competition in that property segment. Given the results that have been announced thus far during the year, we can see people are making a lot of profit. Some of the reasons for that is we haven't had the winds blow or the fires burn just yet. So there is still competition in that sector. I think some of the more disciplined carriers have started to react by walking away because Technical rate probably is being reached, you know, where we're just not getting enough premium for the technical amount of risk that we're taking on. But generally, I think that the competition in the property market will continue on a downward kind of trajectory up and until we get some significant losses, which if you look at the history of the property market, they crop up every now and then. I think as a long-term player, our job is to make sure that we Pick the right risk areas where we feel that we can add something and we can make money at the technical rate. Walk away from those where it isn't there and be around that when the market does start to turn and the capital is valued again to the degree that it needs to be, we'll be there to answer the bell I guess at that point in time. So definitely a competitive environment for the second half but we will see how that storm season goes as you say.

And I'll We've noticed a lot of other companies starting to repurchase stock and return capital and actually that's a pretty good sign for the insurance industry writ large and the degree of discipline that we're seeing across the board is encouraging to me that the fundamentals of supply and demand This time around, it's for the better.

Understood. Thank you. And then, Tom, last quarter you had called out $700 million underwriting profit as a reasonable number. And as we sit here today, is that still achievable in your view?

You know, I think that it's probably a little wider than that, but we're very encouraged by the progress so far, and I don't want to put a number on it. But more importantly, what I observed, is in Simon's leadership with the people that I talk to. People are leaning in. We've got the Cortex business unit that is now out there and starting the right business. So, again, we're a long-term company, and those kinds of numbers are definitely achievable, and the organization is set on the right footings right now.

Great. Thank you for the answers. Your next question comes from the line of Andrew Klee German with TD Cohen. Andrew, your line is open. Please go ahead.

Hey, thanks a lot. I was intrigued by Brian's commentary around the casualty reserve development. He said, I think, Brian, you said modest adverse development and casualty. And then you mentioned the stop loss. Brian, could you give a little more clarity around the accident years and, you know, any numbers would be great. And then with regard to the stop loss, could you give us a little bit of the parameters around that?

Sure. Yeah, so on the casualty side, you know, continue to see, I would say, very modest adverse development. It's not concentrated in any year. It's kind of sprinkled across. A versus E has been pretty much on in some lines. It's been better in some classes. It's been a little worse in others. So you've got to go down another level to kind of get into what we're reacting to. But on the whole, it's been holding up to what we put up a few years ago in the U.S. to strengthen our net position. The stop-loss treaty, the way that works, there's a bunch of deductibles that apply to that. Ultimately, what happens is once we hit an aggregate deductible and there's a per-claim deductible, there's an amount that is now passed on to the reinsurers. That happens on a last-in, first-out basis. So as we sit here today, all of that amount that we're passing along is in ID&Rs. where the incurred losses that are happening in the early part of the tail 100% belong to us. And so those are set based on expected loss ratios when we negotiate the treaty. And then obviously we've seen kind of since those earlier years, 19, 20, 21, have behaved across the industry worse than I think everyone anticipated that stop-loss treaty has started to kick in and provide IV&R that we are ceding to the treaty. Got it.

Thank you. And then outside of insurance, you know, I was very curious around both consumer and industrial, so maybe just starting with consumer. you know 20% adjusted operating income growth on top of 4% revenue and I think I read in the queue about margin enhancement. Do you think that kind of earnings growth is sustainable for the foreseeable future? I mean any color on what was going on there because it was an interesting dichotomy between the The Operating Revenue and the Adjusted Operating Income.

I'm going to invite my colleague Andrew Crowley to speak to that. Andrew, a lot of Andrews here. Andrew Crowley. I'll start with the consumer question first.

I think when you see 4% on a top line and 20% on a bottom line, it wouldn't be fair to extrapolate those trends into perpetuity. What has driven some of the bottom line is frankly the strength of execution of our leaders. As we've mentioned time and time again with that great leadership teams, they have an ability to focus on and drive operational efficiency within their markets during pretty good times, and some of them are operating in pretty good times. In addition, there's a variety of business within the segment, some of which have a higher margin profile versus others. We've seen some outsized growth in businesses with higher margins, which is resulting in that number you see. and lastly, as we alluded to, there are some impacts from full period results. EPI was not in the first quarter in its entirety last year and in the current quarter we have lift from a downstream acquisition in one of our other businesses. I'll just add one other point on consumer while we're on it. It's a good reminder, we called it out in the queue, that Q2 is particularly strong for consumer and if you looked last year, You would see about 60% of our earnings came in that quarter alone, and about 40% of the revenue. So just contextualizing this quarter versus what to expect in the coming quarters and compared to the first quarter. On the industrial side, go ahead. Sorry.

Oh, no, that was very helpful. Yeah, on the industrial side, and that's my last question. Yeah, just kind of curious. It's sort of the opposite of consumer with A 27% decline in operating income versus a 2% gain in revenue. And I don't know, I'm wondering, you know, is this the construction area? Is there a lot of pressure on margins? Just really curious there, Andrew, what's happening?

Yeah, thanks for that question. The good news is similar to the other point. Up a bit on revenue and down a meaningful amount on profit is also a trend that we don't expect to continue. Just to highlight a couple of things within that. You know, where we have called out markets that are in cyclical decline, specifically car hauling and industrial bakery equipment, you do lose a bit of operating leverage as you go down. The good news about those businesses, as Tom alluded to in his shareholder letter in 2024 and Brian in prior comments, Over long periods of time, we've done well. Our competitive position remains strong, and those end markets are enduring and essential to the economy. So we feel really good about where we are. We're just working through a normal cycle. In addition, we have a couple of businesses making SG&A investments for the long term, whether it's a branch-based business opening up a new branch that will generate revenue over time. We continue to want to support our leaders in making those types of long-term investments.

Very helpful. Thank you.

Your next question comes from the line of Drew Estes with Banyan Capital Management. Drew, your line is open. Please go ahead.

Hey, guys. Thanks for taking the question. This is for Tom or Simon. And as you might imagine, this is with regard to State National. I have a few questions. As to the nature of the collateral shortfall, was it that the assets that were posted weren't actually there, or were they bad assets, or did losses develop such that the collateral required was just too little? If you could just provide some color on that, that'd be great.

Absolutely.

Okay, next question is just aggregation risk in State National. I know a lot of these alternative capacity providers tend to play in the same sandboxes. So how does State National think about that and try to manage that risk for the book as a whole?

Yeah, that's the normal course of business and that would be a All the time. Oftentimes, State of Nashville gets involved with very specific kinds of risk or very specific products. And I wouldn't say there are industry-wide aggregation events that are as relevant to some of the selections they would make that would be the case sort of for the industry as a whole. But they do have an over 40-year history of managing those processes and that kind of risk quite well. and so forth. So, we've got a lot going on. We've got a lot going on. We've got a lot going on.

You do want to look at it two ways, one of which is the programs that are originating, the other of which is the reinsurers, and I can confirm that we do look at both. And in fact, as a result of the work we've been doing, it will result in some collateral top-ups for similar lines of business with other reinsurers who are in financially healthy positions, but we will have collateral increases as a result.

Okay, that's good to hear. And just final question, since a lot of these fronting insurers are pretty thinly capitalized because they see the risk, I'm curious if this loss will impair State National's ability to do business, and if so, under what conditions would the parent provide support? Thank you.

Yeah, State National's part of the family.

Okay, thanks.

As a reminder, if you'd like to ask a question, please press star then one on your touch-tone phone. Your next question comes from a line of Mark Hughes with Truist. Mark, your line is open. Please go ahead.

Yeah, thanks. Good morning. Just on State National, I'm just sort of curious what you see in terms of new business opportunities with State National and what it might say about just broader capacity flows within the P&C space. And then I think related to the ongoing discussion, what do you see in terms of I guess terms and conditions, capacity providers being eager for risk sharing, that sort of thing. How much demand and then what's the competitive environment and the ask on the part of potential partners?

Right. I can't really speak to what others are going to do in industry-wide commerce.

I can tell you the state and national operations that has and will continue to operate with Andrew has a thought? I would put it in the camp of normal course ins and outs. So there are times where programs will naturally sunset and move on, and there's times where new opportunities arise. I wouldn't put the trajectory as unusually up or down in that regard. And in fact, if you just go back over a five-year time horizon, you would see modest growth at state, national, and some

And I do want to pick up on that, because I think that speaks to the beauty and the design of the Martell Group system writ large. Every single business that's part of this system, that's part of the Martell Group family, operates with a good balance sheet and a long-term time horizon, and the ability to make good long-term decisions and not be under unusual short-term quarterly pressures. is really one of the keys and one of the factors that has allowed the double-digit compounding, the relentless compounding that's been going on around here for decades. So, obviously, State National's front and center, and it's in everybody's mind right now, but this is the sort of thing that we can absorb, learn from, improve, and the Markell Group system and all the individual operating businesses out there are not overreacting They're making the good long-term decisions that has resulted as a pretty powerful map over a long period of time, and we fully expect that to continue.

Appreciate that. Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Tom Gayner for any closing remarks.

Thanks so much for joining us. Appreciate your interest and support, and we look forward to connecting with you again soon. Thank you.

The conference call has now concluded. Thank you for attending today's presentation. You may now disconnect.