Earnings Call Transcript - MKL Q1 2025

Operator, Operator

Good morning, and welcome to the Markel Group's First Quarter 2025 Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. 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 the press release for our first quarter 2025 results as well as our most recent annual report on Form 10-K and quarterly report on Form 10-Q, including under the caption 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 first quarter 2025 results or in our most recent Form 10-Q. The press release for our first quarter 2025 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 Gayner, Chief Executive Officer. Please go ahead.

Thomas Gayner, CEO

Good morning. Thank you, Jeanine. This is indeed, Tom Gayner, your CEO. I welcome you to our Markel Group first quarter earnings call. Joining me on the call this morning is Brian Costanzo, our CFO and Simon Wilson, our new CEO of Markel Insurance. In Markel Group, we aspire to be the best home in the world for our businesses. Markel Group is a diverse and resilient family of businesses with our insurance business at its core. Working together, the system creates a relentless compounding machine. We're happy to tell you that compounding continued in the first quarter. While we're always happy to report a good quarter, longer time horizons matter more. Our normal five-year measurements display the relentless compounding of our aspirations. In the first quarter, we also took a few significant notable organizational steps of progress on our Forever vision. Specifically, we elevated Simon Wilson to be the new leader of our Markel Insurance business. Simon is a proven leader and winner. He has a clear strategic vision for solidifying and growing Markel's market-leading presence in Specialty Insurance, all while putting the customer first. We're excited for you to get to know him and to hear more about his vision and plan. Under Simon's leadership, our insurance business will continue its path of simplification and growth. We're reducing complexity, making it easier for customers to do business with us, all while improving accountability and increasing our operating efficiency. The re-underwriting of the last two years has created a stronger foundation from which these operational enhancements will build. Under Simon's leadership, I'm confident we can become even easier to do business with and win market share. We see great potential over the years ahead to significantly improve from what's already a strong base of performance. While that work is in its early innings and will require time, we believe we are on the path to better results.

Operator, Operator

Ladies and gentlemen, this is the operator. Please standby. Hello, ladies and gentlemen, the call will begin shortly. We experienced technical difficulties. Please continue standing by.

Thomas Gayner, CEO

Yes. Good morning. Sorry, Tom Gayner. I apologize for the technical difficulties we had. I understand that the call dropped off where I mentioned that we were in the early innings and will take time. We are indeed on the path to better. Apparently for the call as well. Further, Simon's appointment and the changes we're making to the insurance business show that while our Board continues to make progress on its review of Markel Group, we are not waiting to make changes where we see they're needed. In terms of the board-led review, it continues a pace, but we won't have any further update on that today. Stepping back, we enjoy some distinct advantages with our Markel Group system. Markel Group enjoys resilient and robust operating income, comprising recurring investment income of dividends and interest, underwriting profits and operating profits from our Ventures businesses. Further, this operating profit converts well into a river of operating cash flows, given our modest capital expenditures and the negative working capital from our insurance operations. In the full year 2024, that river of operating cash flow amounted to $2.6 billion. In the first quarter, it was $376 million. Our Markel Group architecture allows a 360-degree view of capital allocation opportunities to reinvest that cash, all in a cost and tax-efficient way. For the full year 2024, we invested $208 million in acquisitions, $394 million in net equity purchases, $573 million in repurchasing our shares and $204 million of interest costs and $255 million of CapEx. In the first quarter of 2025, we invested zero in acquisitions, $57 million in net equity purchases, $170 million in repurchasing our shares and $52 million in interest costs and $41 million in CapEx. We believe we're deploying that capital into places where we can earn double-digit returns over time. We've consistently delivered on that goal, and we expect to do so going forward as well. Part of it allows us to do so is our unique cost and tax advantage structure that's positioned to redeploy capital with low friction and 24/7/365 day kind of way. Your money is always working in the Markel Group System. The breadth of opportunity across insurance, ventures, public investments and share repurchases increases the odds we can make favorable capital allocation decisions. All of this amounts to a relentless compounding machine. It seems like there's a news headline out almost daily these days talking about other companies like Brookfield, KKR, Pershing Square and others, trying to create permanent capital vehicles. I'm proud to say we have one, and we've been at it, building such a virtuous operating model and system with your partnership since our IPO in 1986. People often ask me about market developments and specifically in periods like what we experienced in April, to which I reply, I don't have a crystal ball, no one knows what will happen in the short term, but the beauty of our system is how it's built for safety and resiliency. It's built with the idea that we can't and don't know. We've never known with precision what the future holds, but our record indicates that our system flourishes even without perfect foresight. History doesn't repeat, as they say, but it rhymes. There's nothing new under the sun. We manage our balance sheet and business to withstand stress. We have not relied on financial leverage to drive our equity returns. In times of low interest rates, that has made it difficult to keep up with many who do. But in a period of deleveraging, if that is, in fact, where we're in now, while it proved painful for the economy broadly, our model will stand ready to capitalize on its competitive advantages. We will continue serving customers come what may, and I think our conservative and low-leverage approach will serve us very well in the period to come. This morning, I'd also like to extend a warm welcome to Jon Michael, who recently joined our Board of Directors. Jon joined RLI, a specialty insurer we know quite well at Markel in 1982. He was the President and CEO of RLI for 20 years from 2001 through 2021. RLI is one of the longest duration holdings in our stock portfolio. We have owned it for over three decades, over which time the business generated tremendous shareholder value. There is much we can all learn from Jon, and we are excited for the chance to do so. Jon's arrival also coincided with the conclusion of Tony Markel's over six decades of contributions to the company that bears his name. We look forward to properly celebrating Tony later this month at our Annual Meeting, which we now call the Reunion on May 21 in Richmond. Tony is a lion of the industry and for this company. His paw prints are all over the Markel Group, and this will continue to be the case for generations to come. Upon his retirement from the board, Tony will continue to serve as Chairman Emeritus, marking his outsized contributions to your company. The only other person to be given such an honor, the late Alan Kirshner, that should tell you what Tony means to us. Thank you, Tony. Finally, before I turn things over to Brian, in the Q&A, we'll focus on our operating results for the last quarter. I would kindly ask that you keep your questions today focused on those results. We also look forward to being with many of you in Omaha and/or Richmond for our Reunion on May 21st. In Omaha, we intend to share more with you about how we seek to relentlessly compound your capital for the generations to come. We will also take your questions. If you haven't signed up for our reunion, we encourage you to join us and sign up at mklreunion.com. We're excited to welcome over 2,000 shareholders from around the world to our home in Richmond. The reunion for us is our Markel style on display and a chance for you to feel what our home is like. With that, I will now turn it over to Brian, who will walk you through our results for the quarter. After you hear from Brian, Simon Wilson, the new leader of our Insurance business, will introduce his vision for that business and the work that lies ahead. Then we will open the floor for your questions. Thank you.

Brian Costanzo, CFO

Thank you, Tom. Good morning, everyone. At the start of 2024, we began reporting Markel Group operating income for investments, ventures, insurance and on a consolidated basis. Operating income is a key driver of intrinsic value and our long-term incentives. If you must pick one metric for our scorecard, operating income is the best place to start. We use five-year periods to best keep that scorecard and over the past four calendar years, plus the first quarter of this year, we have accumulated operating income of just over $10 billion. Longer time horizons normalize the expected volatility swings in the mark-to-market of our equity portfolio. In the first quarter of 2025, consolidated operating income was $283 million versus $1.3 billion in the same period one year ago. The biggest driver of the year-over-year difference was from changes in unrealized gains on the equity portfolio, which flows through GAAP revenue and operating income, distorting any signal within quarterly year-over-year comparisons. First, within insurance, our largest operating business, we locally empowered great leaders to serve customers in the markets that they know best all while focusing on the long-term with the help of our strong balance sheet. Insurance operating income was $145 million for the first quarter of 2025 versus $136 million in the same period one year ago. The slight improvement year-over-year was driven by more favorable prior year loss development and $31 million of income related to our minority investment in Velocity, a former subsidiary of Nephila. These were largely offset by an increase in catastrophe losses. In Ventures, our operating businesses are autonomous and accountable. We use equity capital to acquire our family of businesses, while promoting a long-term focus and our shared set of values. We see companies with lasting competitive advantages that provide strong, steady returns on capital across economic cycles. Within certain of our businesses, cycles will and do occur; we price that into our underwriting. Although we didn't complete any new acquisitions during the first quarter of 2025, we began consolidating EPI this quarter upon attaining the required regulatory approval following our September 2024 investment in this business. Ventures revenues were $1.1 billion in both the current and prior year quarters for a decline of around 1% year-over-year. Our consumer and building products businesses and transportation businesses saw a deceleration in end market conditions. We saw improvement year-over-year in demand in our equipment manufacturing businesses. Recent acquisitions of Valor and EPI contributed $28 million in revenue in the most recent quarter with no contribution in the same quarter one year ago. Ventures operating income was $103 million in the first quarter of 2025 and $104 million in the same period last year, down 1% year-over-year. Turning over to our investments. Through our public equity portfolio, we own interest in many of the best businesses in the world. We seek out profitable businesses with good returns on capital, management teams with integrity and talent, and companies that have attractive reinvestment opportunities and capital discipline that are available at reasonable valuations. Further, we invest the float of our insurance operations into highly rated fixed income securities while seeking to minimize credit, currency and interest rate risk across our asset-liability profile. Investments operating income was $82 million for the first quarter of 2025 and $1.1 billion in the same period one year ago. Our equity portfolio declined 1% in the first quarter with $147 million in mark-to-market losses, which are included in our Q1 2025 operating income versus $907 million in gains in the comparable quarter last year. Over the long term, our public equity portfolio has created excellent returns, a cumulative unrealized gain of $7.8 billion. We continue to take advantage of our low-cost and tax-efficient structure, long-term lens, and incoming cash flows to compound capital in our public equity portfolio. Net investment income was $236 million in Q1 2025 versus $217 million in Q1 2024. For Q1 2025, our fixed income book yield was 3.5%. During the first quarter, we added new fixed income investments at higher yields, approximating 4.4% versus maturing bonds at approximately 3.6%. 98% of our bonds portfolio was held in fixed income securities that are rated AA or better. Moving now to a little more detail on our underwriting operations, our largest operating business. In the first quarter of 2025, underwriting gross written premiums were up 3% to the prior year, driven by strong growth in U.S. personal lines, specifically our E&S homeowners and Hagerty lines, and more modest growth within our U.S. programs and international general liability and professional liability lines and our reinsurance workers' compensation line. U.S. professional lines are down as expected due to the product transition within our U.S. risk-managed portfolio. Our more modest gross written premium growth this quarter reflects the combination of us achieving growth within the majority of our portfolio while remaining balanced with selective deployment of capital in certain U.S. lines where profitability is more challenged. Earned premium was down 2% in the quarter. We're running a little ahead of plan given we expected to decline in earned premium from our underwriting actions taken last year. We expect the impact of these re-underwriting actions on our earned premiums to soften throughout the year. The overall combined ratio was 95.8% versus 95.2% in the same quarter one year ago. This quarter included roughly $81 million or just under 4 points of impact from the California wildfires, including both losses and reinstatement premiums. That resulted in an ex-catastrophe combined ratio of 92%, which is 3 points better than a year ago. The level of losses we incurred from the California wildfires is a testament to the underwriting actions taken over the past few years to manage our exposure to such events. An industry loss of this size a few years ago would have produced a larger impact on our first-quarter underwriting results. Our current accident year loss ratio was 67.2% in the first quarter of 2025 and 64.1% if you exclude the impact from wildfire losses, which is consistent with the same period one year ago. Prior year loss development was 7.2% favorable in 2025 versus 3.6% in the comparable period. The expense ratio was 35.8% in 2024 versus 34.7% in the comparable period. That's up a point from the same period one year ago, but it's also a point better sequentially versus Q4 2024 and from our plan as we made some progress on efficiency initiatives, which were offset by negative operating leverage from the slight decline in earned premiums. Our exit collateral protection insurance product line or CPI added $16 million or 1 point to the consolidated combined ratio in the first quarter of 2025. As we noted on the previous earnings calls, we still expect CPI losses to decrease in 2025 versus 2024. As a reminder, we took numerous corrective underwriting actions starting early in 2024. We exited several product lines, including primary casualty retail, business owners policy, risk-managed excess construction, risk-managed architects and engineers and collateral protection insurance. Second, across our portfolio, we meaningfully reduced the construction mix in our casualty portfolio. We changed the terms and conditions to eliminate certain exposures to subcontractors, reduced limits on excess lines, and implemented premium caps in challenging states, achieved double-digit rate increases across the casualty portfolio and walked away from risks that were not adequately priced. Third, in our most challenged class U.S. public D&O, we moved to a single access point for public D&O and large financial institutions coverage based out of our Bermuda platform. These collective actions comprised a reduction of $350 million in 2024 gross written premium, but were accretive to our 2024 combined ratio results. As we noted in the Q4 '24 call, they will be further accretive to our 2025 results but will also continue to put pressure on top line premiums, which in the first quarter of 2025, reflected a reduction of $33 million in premiums related to these exited lives. Finally, we continue to hold reserves at a level that we believe is more likely redundant than deficient, shoring up pockets of adverse development trend over the past few years. We expect our reserving philosophy to produce prior year loss takedowns in future periods. We expect all our actions to drive an improved attritional combined ratio in 2025 and continued improvement into 2026. Our reinsurance operations showed modest improvement this quarter with a combined ratio of 90.8% and prior year favorable development of 5 points in the quarter. We remain prudent in our reserving and continue to increase the levels of margin in our current accident year loss picks in reinsurance.

Simon Wilson, CEO of Markel Insurance

Thank you, Brian, and hello, everyone. Thank you for this opportunity to introduce myself and share with you a brief word about my vision for Markel Group's Cornerstone Insurance business. First up, I want to say that I'm a person who likes to keep things simple. The organization that I'm responsible for sells a variety of specialty insurance products across the world. No more, no less. Over many years, Markel has shown that it's been able to do more than hold its own in this competitive market. The key observation that I would make about Markel Insurance is that we really are an amalgamation of many teams who specialize in their very particular areas of the marketplace. We win when we empower the outstanding leaders of these teams to focus on their customers and build businesses around them. My job is to set direction, select great leaders, provide them with the environment in which they can make decisions and hold them accountable to those decisions. In that context, I've looked at the position of Markel Insurance and made several key decisions over the past few weeks. Firstly, we simplified our structure to ensure that our core business units are clearly aligned with the buying behavior of our customers and distribution partners. The U.S. Specialty business has become a bit too large in this context. The leadership with structured delivering products to so many different customers, so we've begun to find it difficult to prioritize our investments. As such, we divided U.S. Specialty into two divisions, so that we can do more things while retaining a high degree of focus on our customers. Second, we're going to double down our commitment to the U.S. Wholesale and Specialty market. This is our absolute core business and why Markel has made this name over a long period of time. It is also a market that has grown significantly in recent years and one that we expect will continue to grow. I'm delighted to say that Wendy Hauser will be leading this critical area of our business. Third, we will progressively shift our shared service organizations such as IT, which currently reside at a corporate center to our frontline divisions. This will create far stronger alignment between technology and underwriting, for example, will also drive greater efficiency in decision-making and increase the speed at which we're able to deliver products to customers. I plan to share more about the broad outline of this plan when we speak to our investors in Omaha on May 4th, as today's call is dedicated to our quarterly results. In summary, I firmly believe that the combination of selecting great leaders and then trusting and empowering them to build great businesses differentiates Markel, when hiring people and serving customers is the secret sauce that creates pride and ownership to ensure that good decisions are made every single day without the need for micromanagement. Markel has believed in this approach since the beginning, and it will drive our success going forward. I want to end by saying this role is the most exciting professional opportunity of my life. I look forward to the work ahead. We have tremendous potential here at Markel. It's time for us to show the world what we can do.

Thomas Gayner, CEO

Thank you, Simon. Unfortunately, given our technical difficulties. I'll ask my colleagues to let me know if you can hear me or not.

Simon Wilson, CEO of Markel Insurance

We can hear you.

Brian Costanzo, CFO

We can hear you.

Thomas Gayner, CEO

Okay, great. Thank you, Simon. Finally, you may have noticed the press release that we sent on April 15th. As part of our annual Omaha Brunch tradition, this year we will be answering questions as we always do, and we can't wait to see all of you there. Before we open the Q&A this year in Omaha, we will be giving a brief presentation. While this marks a slight deviation from our tradition, there's been a lot going on in the business, and we felt in this specific year, it is important that we share some updates with you, our partners. We thought there would be no more appropriate setting to do so than in Omaha in a room full of our longest tenured and most engaged partners. With that, we will open things up to your questions. And I'd also like to note that Mike Heaton, our COO is also in the room to join us for the Q&A. Jeanine, would you be so kind as to open the floor for questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from the line of Andrew Kligerman from TD Securities. Sir, please go ahead.

Andrew Kligerman, Analyst

Hi, good morning. My first question is about the favorable 7.2% development from the prior year, specifically regarding professional and general liability. Could you provide some details on the accident years and share more information about the products where you're noticing this positive development?

Thomas Gayner, CEO

Thank you, Andrew. I'll ask Brian to respond.

Brian Costanzo, CFO

Yes. Thanks, Tom. Andrew, so what I would say is really what we saw in the first quarter was pretty much a quiet quarter from kind of an actual versus expected loss development. And so if you pair that with kind of our level of prudency and how our reserving philosophy is formed consistently be more likely redundant than deficient. That reserving philosophy produces a natural amount of takedowns quarter-over-quarter. We allocate that prudency largely into those professional and casualty longer tail lines. So really what's coming through is just us moving prudency into the current year and taking a little of that out of the prior years with kind of benign activity across the rest of the portfolio.

Andrew Kligerman, Analyst

Got it. Okay. And maybe moving over to the expense ratio at 35.8%, and you cited that it was one point better than Q4. I've observed a number of developments. I think you talked about some time ago, put out a release on Guidewire, managing your claims, Simon, who's just talked about simplification. Any sense of where that 35 intake could go? I know a lot of your peers are under 30. Any thoughts on your objective or where that can go?

Thomas Gayner, CEO

Yes. Thank you, Andrew. Brian, continue, if you would, please.

Brian Costanzo, CFO

Yes. So Andrew, what I'd say is we're not where we want to be. The expense ratio, where we're at is not where we want to get to. We certainly have a little bit of drag in there from a handful of things, one being continued investment in the IT space. Another we talked about is launching some new platforms, particularly in Asia and Europe, where we've hired a lot of the staff to grow those businesses. The earned premium just hasn't come through to catch up with that. So you’ve got some natural things that will bring that down over time. We also have a few things in the quarter, our total earned premium being down 2%. Some of the underwriting actions we took last year are starting to come through. That will start to diminish off, and we'll see more normal earned premium growth, which will create some lift in the expense ratio, along with a few one-time items in the quarter around some consulting expenses and severance costs that have a little bit of a drag. So while we won't give an exact number, we definitely are targeting something lower than what we're sitting today.

Simon Wilson, CEO of Markel Insurance

Yes. And Andrew, I might just add. Simon here. We talked about simplification. One of the things that I'm very, very focused on is having clearly aligned P&L statements and owners that sit on the top of those P&Ls. And I kind of spoke a little bit in my comments about moving our central services into those business units. And I think what that does naturally is give business leaders a decision to make over what needs to have and what's nice to have. And I think there's just a natural opportunity there for us to reassess the expenses and we're putting those investments or where we're spending our money. And naturally, I think that will reduce the total number of dollars that we're spending on various things. Now like Brian said, I'm not going to put a target on that today. But that's the direction of travel. And when you put business leaders in charge of their P&Ls and give them clear accountability for it, I think good things come from that overall.

Andrew Kligerman, Analyst

Got it, thanks very much.

Operator, Operator

Thank you. Our next question comes from the line of Mr. Mark Hughes from Truist. Please go ahead.

Mark Hughes, Analyst

Yes, thank you very much. Good morning. What should we think about the cadence of the top line as we go through the year? I think you'd mentioned we should start to see a little bit more momentum. Just trying to get a sense of how much more kind of refinement of the book is ahead of us? Or will we start to transition to more of a growth top line?

Thomas Gayner, CEO

Thank you, Mark. And I think both Simon and Mike and Brian might have a point of view about that. I will also add in from the Ventures side comparisons we had against a wonderful year last year made for tough comparisons, but the Ventures business is doing well, and I'll let my colleagues speak on the insurance side.

Simon Wilson, CEO of Markel Insurance

Yes, this is Simon speaking. I'll start on this, Mark. Thank you for the question. Regarding '23 and '24, we are placing a strong emphasis on re-underwriting. There are underwriting actions that Brian mentioned, which, while beneficial for improving the combined ratio over time, will somewhat limit our growth as we focus on certain areas. Much of the critical work is being carried out during this period, laying a solid foundation for future growth. While we're always making decisions about our extensive portfolio, I believe the toughest challenges are behind us, creating an excellent opportunity to focus on growth. This setup allows us to hone in on specific markets that we’ve established profit and loss centers for. For instance, under Alex Martin's Programs and Solutions business, we have Markel Personal Lines led by Jeff May, which has seen substantial demand lately. Jeff has been driving this independently with his team, and now, with Alex's oversight, we can look into how to enhance Jeff's personal lines to grow it from its current $650 million to a profitable $1 billion. The same growth potential applies to our workers' comp and surety segments, as well as the wholesale and specialty lines led by Wendy. Our structure enhances our focus on investment opportunities, and I see significant potential both in the U.S. and globally. We anticipate '25 to be a transitional year with flat premiums at the start, followed by expected growth in the latter half. The initiatives we launch in '25 will yield benefits in '26 and beyond.

Brian Costanzo, CFO

Maybe I'll just throw two quick things at what Simon said. If you think on the U.S. side, our most profitable lines grew about 8% in the quarter. A lot of that was in our E&S book and E&S platform on the U.S. side. The other point I'll make on the international side, our growth was around 3%, but the dollar weakened quite a bit in the first quarter. So if you take constant rate of exchanges to normalize that, it's more like 6%. So there is a little bit of FX noise kind of in the top line number, particularly on the international side.

Mark Hughes, Analyst

Yes. The 6% adjustment, was that the overall written premium company-wide?

Thomas Gayner, CEO

No, that's just on our international division, just within the international business.

Mark Hughes, Analyst

Okay, yes, yes. Okay, very good. And then, Simon, I think you mentioned you had optimism about U.S. wholesale and specialty. I think the new structure is part of that. Is there anything out of the market that you see that gives you optimism? Anything about casualty pricing, loss trends, driving the top line? What is influencing your thoughts there?

Simon Wilson, CEO of Markel Insurance

Yes. In the wholesale and specialty sector, particularly regarding excess and surplus lines, the compound annual growth rate in that market in the U.S. over the past five to six years has been 20% year after year. This can sometimes be influenced by whether the market is soft or hard; during hard market conditions, business typically shifts into excess and surplus. I believe there is now a structural shift occurring in the U.S. marketplace towards excess and surplus lines. This is largely because customers are increasingly expecting more from their coverage and the solutions offered by insurers. They are less interested in standard options and are looking for specialized offerings that meet their specific needs, which are typically found in the excess and surplus market. We have observed considerable growth and rising customer demand for products in this area. Additionally, the major brokerages like Amwins, CRT, and RT Specialty have strengthened, resulting in more business being directed towards them, along with increased investment in this market. I see a significant structural change and momentum within the excess and surplus space in the overall U.S. wholesale and specialty market. Currently, this business is valued at approximately $100 billion, and I am optimistic because it aligns perfectly with Markel’s strengths in underwriting, distribution, and our interactions with customers and brokers. Regarding rates, particularly in the casualty market, we are indeed seeing necessary rate increases. Claims trends have significantly risen in recent years, which has been a consistent issue throughout the industry. The market is reacting strongly; for instance, in the first quarter of this year, we saw a rate increase of 13%, following a 10% increase in 2024. This indicates a continued upward trend in rates. We are also noticing a reduction in the size of lines offered in the market, allowing for more targeted underwriting in the casualty space. This situation creates substantial opportunities for Markel, especially now that we've made necessary adjustments in 2023 and 2024. Overall, the reasons for optimism include general market growth, our capabilities in this area, and particularly favorable rates in the casualty lines of business as we see it today.

Mark Hughes, Analyst

That's a pretty good dual point there, Simon. You would say if we were operating at peak efficiency, you still feel pretty optimistic about the marketplace and tailwinds, summing up some of what you said there, but you couple that with some of the changes you're making internally where for whatever reason, we haven't necessarily had quite clarity of P&L ownership that you might want to see. And now you've got leaders who will be very, very clear and about the business that they own and the decisions that they're responsible for making. You put those two things together, it's going to be pretty interesting.

Simon Wilson, CEO of Markel Insurance

For sure. Absolutely.

Mark Hughes, Analyst

Thank you very much. Appreciate it.

Operator, Operator

Thank you. Our last question comes from the line of Andrew Andersen from Jefferies. Please go ahead.

Andrew Andersen, Analyst

Hey, good morning. In the Q, you had mentioned that you decreased the level of caution and loss reserves. Could you maybe talk about what drove that level of change in caution, just given that social inflation is still pretty high across the industry?

Thomas Gayner, CEO

Thank you, Andrew. Brian, would you handle that?

Brian Costanzo, CFO

Yes. I would say it's cut it back to the answer that I gave Andrew earlier. It's really about kind of realizing a fairly benign quarter and kind of flipping some of the prudency into the current year, taking some out in the prior year. We still hold a high level of redundancy in our casualty lines; our core loss picks there have remained fairly steady. We haven't budged off of those at all. It's just more of the level of prudency that we hold across the balance sheet as a whole that's moving around. Within the professional space, we continue to be watching closely, particularly in that risk-managed kind of large account. Certainly, we've seen some pops and claims in the 2022 year across the industry, it started out fairly early in the tail, pretty rough. So we have been adding a little bit in that space to kind of continue to buffer that year.

Andrew Andersen, Analyst

Thanks. And then I think you said on the insurance underlying loss ratio, you think there could be improvement year-over-year. I just want to level set what base should we be looking at for '24.

Brian Costanzo, CFO

Yes. I would say, ultimately, what's going to happen is the underwriting actions that we've taken over the last 1.5 years or so start earning their way through. Those underwriting actions were targeted to bring down the attritional loss ratio. So you'll see that kind of call its way through the results quarter-over-quarter and the earnings mix shifts. We've also shifted the portfolio from just a growth standpoint towards more premium in our more profitable lines, so that should improve the combined ratio overall, may or may not shift the loss ratio versus the expense ratio depending on which line that is. So a line like Surety that we feel very good about. We've been growing quite a bit in that has a very different kind of loss ratio, expense ratio profile than some of our other lines.

Andrew Andersen, Analyst

Sorry. So just to be clear, if we're looking at the 63.5% insurance ex cat, ex PYD, that's what we should be thinking there's improvement relative to?

Brian Costanzo, CFO

I would say we would continue to see that mark sway down slowly over time, yes.

Andrew Andersen, Analyst

Okay. Thanks. And then just last one. I think last year within Nephila, you made a comment that you were kind of doing some hedging and you didn't really deploy all the business just given, I think it's still kind of an active hurricane outlook according to Colorado State, and it's still obviously very early in the year. But can you maybe talk about just capital deployment on Nephila and how it could earn into other ops?

Thomas Gayner, CEO

Brian, if you would handle that?

Brian Costanzo, CFO

Yes. So I mean, Nephila, they kind of go year-by-year in terms of their strategy, looking at what's out there in the marketplace. They deployed some of their capital; some of their capital is still in the process of being deployed, certainly elevated cat seasons on their mind. What they're going to do is what they think is in the best interest of their investors. And how do they manage returns for their investors and kind of what they believe the current climate is. So that could involve various levels of buying certain types of hedges, whether they be cat bonds or IOW within the portfolio. When they buy those, they tend to use our rated paper to front them. So that's what you're seeing in the Q. It's just Markel providing access to our rated paper to facilitate the transactions that they're using to manage kind of the expected returns for their investors.

Andrew Andersen, Analyst

Thank you.

Operator, Operator

Thank you. Our last question comes from Andrew Kligerman from TD Securities. Please go ahead, sir.

Andrew Kligerman, Analyst

Yes, thank you for taking my follow-up question. Simon, I'm kind of curious with the addition of Guidewire, what are you doing in terms of data and analytics and AI? And how do you see Markel's insurance operations relative to your peers in that area?

Simon Wilson, CEO of Markel Insurance

Thanks for the question, Andrew. So data and analytics on my mind is an absolutely fundamental critical area of the industry, right? People who are going to start winning in data analytics, they're going to be able to price better, price quicker, respond faster to various customers. Whether you're in personal lines, commercial lines or specialty lines that we're putting forward here, I think that's going to be very, very important. Obviously, I was responsible for a long time for the international operations. And in that segment, we probably increased our spend in the data and analytics team fivefold over the last three years. So we've created a body of people who literally come to work and just building models and they're building data warehouses, which are operating with API tucked in as well to tell us more about the business than we've ever seen before. And we're getting genuine, with huge returns on that, and the underwriting community is using that team more and more. I think we've probably got upwards of 40 people in that team, and it was only a team of kind of three or four previously. We're going to be taking those skill sets that we see in the international operations and building on a smaller group of people that we have here in the U.S., but it's something that I'm very focused on to spend some more of our investment dollars. That's going to be crucial to us in the future. AI technology, that's being used increasingly around the business. We see it in some of the data ingestion that we're bringing into some of our systems so that that's being done automatically rather than it's being done by people, frees up our people's time to underwrite and then serve customers. So I think that will play an increasing role as we go through the next few years. Not all the AI, by the way, is being done in-house. We're partnering up with specialists outside of the organization to do some of our processes for us. We see quite a lot of that from partners out in India. So AI doesn't always have to be done at home. It can be done with partners who are really focused in that area. Guidewire is slightly different. I would say the Guidewire investment is particular to our claims organization. We've taken many systems that we're operating independently, and we're putting all of those on one claims Guidewire system, which we felt it was a terrific investment in that particular area. And ultimately, claims is what we're selling when we need those people to work both efficiently and have workflows, which are just top of market, and that's what the Guidewire system does. That's just coming to force actually over the last quarter, we started to use the Guidewire on annual, and we'll start to use that increasingly as we go through the year. And I think that will lead to both efficiencies, but the quality of our claims dealing as well. I hope what I've given to you, and very happy to take follow-ups on this, is a focus on investment around data analytics and our core technology stack as well. We are spending tens of millions in those areas at the moment to revolutionize the quality of what we do at the coal phase, but our ability to actually see what's going on across the portfolio from a management perspective as well is something that I'm passionate about and will continue to push over the next year or so.

Andrew Kligerman, Analyst

Those are really good insights. Thank you for that. My follow-up is regarding the Ventures business. It seems that revenue decreased by about 1%. I'm curious to hear more about this. You mentioned during the call that both consumer and building products are experiencing a slowdown or possibly a decline in revenue. Could you provide more detail on what you're observing across your various ventures and what we might anticipate for the year ahead?

Thomas Gayner, CEO

Hey, Andrew, yes, it's Tom, and I'll invite my colleague Mike to speak as well. Mainly, the first quarter last year was a white-hot quarter and specifically the highest heat and most wonderful economic performances were in the realm of transportation and construction that we spoke of. So it's just, frankly, a fairly challenging comparison. By the time we get to the second half of the year, those comparisons will be a little easier and a little more normal. In terms of the turbulence that you see in the economy, I think the first quarter was pretty good. We're attending, we're looking at the monthly financial statements. We're attending the Board meetings of each of the businesses to try to keep our fingers on the pulse of what's happening there in the economy. And I would say any data, any hard data that you look at is still pretty early days, but everybody is hypersensitive to changes in the economy that may or may not come as of yet, things are carrying on at a pretty good level. So I'll pause there and let Mike pick up if he has anything he wants to add to that.

Mike Heaton, COO

Maybe just to further the point, I agree with all of that for sure. Maybe here's the way you could think about it, Andrew. If you think about each of those businesses as a car. We have different kinds of cars within that family of companies. Some of them are Steady Eddies. They go 55 miles an hour down the road every single day. And those are a little easier to get your hands around. We've got a really good stable base of those. And a number of those businesses, Tom alluded to, and we've said this quarter after quarter after quarter for many years or the kind that you buy expecting to go 55 miles an hour, but sometimes they're going 65 miles, sometimes they're going 45 miles. In recent years, a number of those important cars have been going to 65 miles. And that's fantastic. I mean we'd love that and now maybe they're easing back down closer to the 55 miles. And sometimes it's hard to know if they're going to go to 50 miles before they come back to 55 miles. We don't really worry too much about that as long as over the course of years, they're going to the speed at which we expect them to go. And on the whole, that's absolutely true. So that's some of what we're feeling, and it's a little hard to look at them and know exactly which speed on aggregate, we're going to end up on. But as Tom said, we're really thrilled with the last couple of years. And that's a good thing.

Andrew Kligerman, Analyst

Thank you.

Operator, Operator

Thank you. Our question comes from the line of Charles Gold from Truist. Please go ahead.

Charles Gold, Analyst

Thank you, Simon, and congratulations. I look forward to spending some time with you at the reunion. I appreciate the shift towards simplicity and clarity. I'm not certain if the clarity I perceive is due to my recent cataract surgery or if the numbers are indeed clearer. I have a few observations that I hope you can clarify. First, I noticed two acquisitions last year totaling approximately $310 million in cash. In my view, you are taking 4% of those dollars and potentially earning 10% to 12% returns over time through compounding. The investment income is nearing $1 billion. I realize you don’t pay full tax because some income is municipal, but after taxes, $800 million with 12.5 million shares translates to a significant figure of $60 per share at the start of each year. I understand the lines will cross again, but for now, they are still trending positively for us. You have two products that have been challenging with IP and letters of credit, but they are in runoff, and the figures are slightly lower than what you initially projected. It seems these will contribute favorably in 2026 compared to 2025, and the likelihood of that is quite high. I usually avoid discussing the catastrophe line, yet perhaps the fires are exceptional, making a 2% estimate more realistic. So, considering 2% and another 2%, you are operating at around 92% currently moving forward, with a declining expense ratio as you indicated. This leads us to anticipate a 91% company heading into next year with half the catastrophe losses experienced this year, while we’ve been grappling in the 96% to 98% range. If we achieve $1 billion in investment income this year, which would represent $2.50 per quarter, along with a 5-point reduction in the combined ratio and a Markel Ventures division that is performing well and bringing in more revenue and EBITDA due to the new additions, the overall picture has become clearer for me. I just want to ensure my understanding is accurate through my new perspective.

Thomas Gayner, CEO

Hey, Charles, this is Tom Gayner. I'm glad to hear your cataracts are indeed working well. Directionally, I agree with your math. The only other thing I would add is that we did last year spent $573 million to buy back our shares, and we also spent $170 million doing that through the first quarter of this year. So we're applying some of that capital that we're already generating, not theoretical. That's cash being used for the business. So it's being divided by fewer number of shares outstanding.

Charles Gold, Analyst

As you know, that's only on my mind daily. And I've beaten you up over the years on that subject, and I applaud the actions that you're taking. You're not saying the words, you're walking the walk. So that's the right thing to do.

Thomas Gayner, CEO

Thank you. I don't think my colleagues have anything to add. They can jump in if they do.

Charles Gold, Analyst

Show up at bridge sometime.

Operator, Operator

Thank you. This concludes our question-and-answer session. I would now like to turn the conference back to Tom Gayner for closing remarks.

Thomas Gayner, CEO

Again, thank you all for joining us. We apologize for our technical difficulties along the way. We hope to see you in person, either in Omaha and/or Richmond over the coming weeks. And if not before then, we'll connect 90 days from now on the call. Thank you very much for joining us. Be well.

Operator, Operator

This concludes today's conference. Thank you for attending today's presentation. You may now disconnect.