Good morning, and welcome to the Markel Corporation third 1/4 2022 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 touch tone phone.
To withdraw your question, press star 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 statements is included in our most recent annual report on Form 10-K and quarterly report on Form 10-Q, including under the captions Risk Factors and Safe Harbor and Cautionary Statement.
We may also discuss certain Non-GAAP financial measures in the call today. You may find the most directly comparable GAAP measures and a reconciliation to GAAP for these measures in our most recent Form 10-Q. Our Form 10-K and Form 10-Q can be found on our website at www.markel.com in the For Investors section. Please note this event is being recorded. I would now like to turn the conference over to Tom Gayner, Co-Chief Executive Officer. Please go ahead.
Thank you, Regina. Good morning. Let me add my welcome for the Markel Corporation third 1/4 conference call. This is indeed Tom Gayner, and it's my pleasure to welcome you to our quarterly call. I'm joined this morning by my Co-CEO, Richard Witt, and our CFO, Jeremy Noble. They will update you on our overall financial results and our insurance operations in just a minute. Before they do, as they say in the news business, don't swallow the headline.
Well, here's the headline: Things are going very well at Markel. I'm delighted to share these results with you, full stop. Now, I recognize that when you look at the headline numbers, that may not be your immediate reaction. Please let me share a few points with you that might help you enjoy the same sense of progress and optimism that I have.
First, our insurance operations are solidly profitable and growing at the same time. Richard and Jeremy will give you more numbers and details on this. From my point of view, to earn these sorts of underwriting profits and to be growing and to continue to report favorable reserve development in the face of ongoing Large-Scale natural catastrophes such as Ian and ongoing inflationary pressures, whether CPI flavor or social flavor, is fantastic.
I am so proud of and grateful for our insurance operations and the results they are posting. We've had some bumps along the way in pieces and parts of our insurance operations in the last few years, but I think these results validate the hard work, the hard decisions, the discipline, and the dedication of the people of our insurance operations. I also think these results bode well for the future.
Second, our reinsurance operations posted solid profitability in the face of all of the challenging factors I just noted. The ongoing high levels of property catastrophe losses for the industry would normally correlate to tough results in our reinsurance business. We've spoken for the last several years about what we've done to improve our reinsurance results, and I hope these numbers provide you with some assurance that we're on the right track.
More importantly, I think these reinsurance results speak to something very important about our culture. There's no question that reinsurance results were far from optimal in recent years. As is always the case around every aspect of Markel, we did our best to figure out what was wrong, what we needed to improve, and then we went about the work, the hard work of making things better.
As is always the case, we didn't deny there was a problem, and we didn't run away from it. We just went to work every day and concentrated on making it better. We've sensed internally that things have been better in our reinsurance operations for a while now, but with the time lags involved in insurance accounting, it takes a while for those results to be visible in our financial reporting.
Additionally, and we should emphasize the improvement, consider the acid test of the modest impact of Hurricane Ian on our results. In Sherlock Holmes terms, Hurricane Ian was the dog that didn't bite. I hope that you can now share our confidence that we're on the right track in reinsurance and that it will be a valuable contributor to our overall results going forward. Third, Markel Ventures continues to set new records in revenues and profitability.
Markel Ventures provides doses of resiliency, optionality, culture, and cash to the Markel Corporation. The people of Ventures continue to operate in challenging environments of supply chain challenges, tough labor markets, inflationary pressures, and increasing regulatory burdens. Despite those ongoing challenges, the Ventures teams continue to set new records.
I can't thank them enough for their ongoing and unrelenting commitment to excellence. Fourth, our State National and Nephila operations continue to make progress. The performance of State National continues to go from strength to strength. There are also two important items of note at Nephila that I hope encourage you. One is that we've received proceeds of over $300 million from the sales of the two MGA operations that were part of Nephila.
Secondly, as we roll through another difficult year of industry catastrophe losses, the performance of the Nephila funds demonstrates the underwriting process is creating investment results that track expectations. The impact of storms like Ian and other industry losses are developing along the lines expected by our modeling and loss expectation methodology, and that bodes well for the future. Four, investments.
Wait, what? On the surface, the Well-Known declines of both equity and bond markets are penalizing current reported returns. That's true, but what does that mean? The answer is, it depends. If markets were going down and we had to sell our investments at the same time, that would be awful. If markets were going down and we just stood pat, that would probably be okay, but not wonderful.
If markets were going down and we were steadily buying more equity securities and bonds with higher interest income and our own stock at lower prices, that would be fantastic. I'm delighted to report to you that our circumstances today are exactly that. We're buying. That adds to the overall earning power of Markel over time.
Fifth, so far this year, we've repaid $350 million of senior Long-Term debt, and we've repurchased $208 million of Markel stock. That amount almost doubles what we repurchased in the first 9 months of last year. Six, our recurring net investment income of the interest income and dividends we receive continue to grow. During the 1/4, that line item grew 18% from $91 million to $108 million.
I think we can reasonably expect to see ongoing increases in recurring investment income for the foreseeable future. To summarize, before I turn the call over to Jeremy, I like our hand. You, as our shareholders, own a profitable insurance operation that is growing. We're investing those profits at positive Long-Term rates of return in additional insurance opportunities, publicly traded securities, Ventures operations, and our own shares.
You're hungry for good returns from your investment, and so are we. You can picture Markel as a pizza. The size of the overall pizza is growing, and we're cutting it into fewer slices. Seems to me like the value of each slice is growing. I'm guessing the market will see it that way in the fullness of time.
With that, we'll shift away from the talk of pizza, and I'll turn now to Jeremy to provide more color and details on the financial results. Jeremy?
Thank you, Tom, and good morning, everyone. We often talk of win-win-wins and of the importance of being an organization for which others are better off for being associated with. It's events like Ian that remind us of this virtue and where we must follow through. I'm incredibly proud of our associates who are tirelessly supporting our customers and the local communities that have been impacted.
Whether we look to our settling of claims to get people back on their feet or the supply of building materials to help restore, Markel is actively working to improve the situation, and our thoughts continue to be with the people of Florida at this time. We remain pleased with the strong performance of our insurance and Markel Ventures operations. We are confident in the quality and durability of our investment portfolio as we.
as well as our ability to execute against our operating plans within our insurance and ventures businesses. We continue to find opportunities to allocate capital across our three engines, and we remain focused on building Long-Term shareholder value. Overall, it's been a pretty solid first 3 quarters of the year. Looking first at our underwriting results, gross written premiums surpassed $7.5 billion for the first 9 months of 2022, compared to $6.3 billion in 2021, an increase of 19%.
Our increased premium volume reflects new business volume, strong policy retention levels, more favorable rates, and expanded product offerings. Our professional liability and general liability product lines continue to lead the way, but we also achieve meaningful growth across many of our other product lines.
Our consolidated combined ratio was 91 for the first 9 months of both 2022 and 2021. Our 2022 combined ratio includes $70 million of net losses attributed to Hurricane Ian and $35 million attributed to the Russo-Ukrainian conflict, which combined added 2 points to the Year-To-Date combined ratio.
All losses attributed to the Russo-Ukrainian conflict were recognized in the first 1/4, and our initial estimates associated with this event remain unchanged. In 2021, we incurred $182 million, or 4 points, in net losses from natural catastrophes in the first 9 months. Excluding these loss impacts from both years, our consolidated combined ratio for the first 9 months of the year was 89, compared to 87 for the same period in 2021.
The increase reflects the impact of less favorable development on prior accident year loss reserves this year compared to last year, partially offset by a lower expense ratio. With regards to prior year loss reserve development, prior year loss reserves developed favorably by $204 million in the first 9 months of this year, compared to $366 million in the first 9 months of last year.
In 2022, among the reasons we experienced lower favorable development was due to greater than anticipated claims settlements and increased claims frequency and severity trends on certain of our professional liability product lines within our insurance segment.
The impacts of economic and social inflation have created more uncertainty around the ultimate losses that will be incurred to settle claims, particularly on our longer tail product lines such as professional liability and general liability. As a result, we are approaching reductions in prior year loss reserves cautiously, particularly on more recent accident years.
As I stated last 1/4, and consistent with our reserving philosophy, we are responding quickly to increased loss reserves following any indication of increased claims frequency or severity in excess of our previous expectations. In instances where claims trends are more favorable than we previously anticipated, we're often waiting to reduce our loss reserves, and we'll evaluate our experience over additional periods of time.
Turning to our investment results, net investment losses included in net income were $2.2 billion in the first 9 months of the year, were primarily attributable to a decrease in the fair value of our equity portfolio, driven by significant declines in the public equity markets during the period. This compares to net investment gains of $1.2 billion in the first 9 months of last year, attributable to an increase in the fair value of our equity portfolio, driven by favorable market value movements.
As you've heard us say many times before, we focus on Long-Term investment performance. We continue to maintain our investing discipline, understanding the periodic declines in the equity markets are to be expected and will result in the variability and timing of investment gains and losses. We will continue to measure investment returns over longer periods of time.
At the end of September, the fair value of our equity portfolio included cumulative unrealized holding gains of $3.9 billion. With regards to net investment income, we reported $274 million in the first 9 months of this year compared to $284 million from the same period last year. The decrease reflects the impact of losses recognized on equity method investments this year compared to income from equity method investments last year.
Net investment income on our fixed maturity securities this year was up slightly compared to last year. The impact of higher average holdings in fixed maturity securities in the current year was mostly offset by lower yield compared to the same period a year ago.
We're beginning to see the benefit of higher interest rates on our net investment income through recent purchases of higher yielding fixed maturity securities. That impact will become more meaningful in future periods as lower yielding securities mature and continue to be replaced with higher yielding securities.
Beginning in the second 1/4 of this year, the book yield on new purchases began to exceed the average book yield of our portfolio. Net unrealized investment gains decreased $1.3 billion net of taxes during the first 9 months of this year, reflecting a decline in the fair value of our fixed maturity portfolio, resulting from increases in interest rates. As a reminder, we typically hold our fixed maturities until they mature. We generally expect these unrealized losses to reverse in future periods as bonds mature.
Our portfolio has an average rating of AAA, and there are no current or expected credit losses within the portfolio. Now I'll cover the results of our Markel Ventures segment. Revenues from Markel Ventures increased 31% to $3.5 billion for the first 9 months of 2022, compared to $2.7 billion in the same period last year.
This increase reflects the contribution of revenues from our December 2021 acquisition of Metromont and August 2021 acquisition of Buckner, as well as organic growth across many of our other businesses, most notably at our construction services businesses. EBITDA from Markel Ventures was $353 million for the first 9 months of this year, compared to $304 million during the same period last year.
The increase reflects higher revenues and improved operating results across several businesses, as well as the contribution of Metromont. Looking at our consolidated results for the first 9 months of this year, our Year-To-Date results demonstrate how well our core operations are navigating the current economic environment and executing at a high level.
We reported a net loss to common shareholders of $922 million for the first 9 months of this year, compared to net income to common shareholders of $1.5 billion in the same period a year ago. This was largely attributed to the Year-Over-Year swing in changes in our public equity portfolio valuation. Comprehensive loss to shareholders for the first 9 months was $2.2 billion compared to comprehensive income to shareholders of $1.3 billion in the first 9 months of last year.
Again, this was driven by both fixed maturity and public equity valuations. It's worth highlighting that given the magnitude of our equity portfolio, we believe generally accepted accounting principles, which require that we include unrealized gains and losses on equity securities in net income, create volatility in revenues and net income, which can obscure the strong operating performance of our businesses.
Finally, I'll make a few comments on cash flows, capital on our balance sheet. Net cash provided by operating activities was $1.9 billion in the first 9 months of this year, compared to $1.6 billion the same period last year. Operating cash flows in 2022 reflected strong cash flows from our underwriting operations, given the growth in premium volume.
Total shareholders equity stood at $12.3 billion at the end of September, compared to $14.7 billion at the end of the year. Again, this decline is driven by declines in both the fixed maturity and public equity valuations, as I previously discussed. July first, we retired $350 million, 4.9% unsecured senior notes. During the first 9 months of 2022, we repurchased 163,000 shares of our stock under our outstanding share repurchase program. With that, I'll turn it over to Richard to talk more about our insurance business.
Thanks, Jeremy, and good morning, everyone. We produced another strong 1/4 of operating results within our insurance businesses, benefiting from reduced volatility within our underwriting operations. This was partially achieved through adjustments in our property catastrophe underwriting strategy and appetite over the past few years. Our combined ratio for the 1/4 of 93 includes Hurricane Ian, a significant industry catastrophe event.
Ian added four points of underwriting loss to our third 1/4 combined ratio. In previous years, the impact of a catastrophe event of this size would have had a more adverse impact on our underwriting results. We continue to see strong Top-Line growth across our product lines, achieving 19% growth for both the 1/4 and Year-To-Date periods within our underwriting operations. Total underwriting premium production passed $7.5 billion for the 9 months.
This exceeds the total underwriting production volume for the full year just two years ago in 2020. While we continue to benefit from mid- to high Single-Digit rate increases across our underwriting operations, our production growth has also been significantly influenced by new business growth, the development of new products, and the onboarding of new program relationships.
Our focus on expense discipline and scaling our operations produced a Year-To-Date expense ratio of 33%, representing a 2-point improvement from a year ago. Consistent with my comments last 1/4 and Jeremy's comments, we remain cautious in our approach to recognizing prior year loss reserve takedowns in keeping with our conservative reserving philosophy.
While we are seeing favorable actual versus expected loss trends in many of our product lines in the most recent accident years, we are being cautious about realizing these potential benefits until the impact from various forms of inflation and court processing delays are more fully understood. Now I'll discuss our Year-To-Date results within our insurance engine, which include our underwriting operations, program services and fronting operations, and our insurance-linked securities operations.
Let's dive into the insurance segment first. Gross written premiums and earned premiums in the insurance segment were up 21% for the first 9 months of this year. We realized 15% or higher premium growth across all our major product lines, with the exception of workers' compensation, which, while growing, continues to face small rate decreases. Premium growth was most notable in our general liability and professional liability product lines.
The combined ratio for the first 9 months of the year in the insurance segment was 91%, compared to 88% last year. The current year combined ratio included $90 million, or just under 2 points of net losses related to Hurricane Ian and the Russo-Ukrainian war, versus $89 million, or just over 2 points of net losses last year related to 2021 catastrophes.
Excluding the impact from these event losses, the combined ratio increased by 3 points due to less favorable development on prior year losses, partially offset by a lower expense ratio due to benefit from higher earned premiums and relatively flat operating expenses. The lower favorable development on prior accident year losses was driven by lower takedowns in our longer tail product lines, such as our U.S. general liability and professional liability books.
As I mentioned earlier, we are taking a cautious approach in our reserving process to realizing prior accident year loss takedowns. At the same time, we are reacting quickly to pockets of adverse development. We also increased our attritional current accident year loss ratio in the third 1/4 within these product lines to reflect the claims trends we have been seeing in the past few quarters, including responding to general inflationary trends.
On a Year-To-Date basis, our current accident year attritional loss ratio remains down slightly versus the prior year as pricing and underwriting actions are modestly ahead of claims trend. Turning next to our reinsurance segment, gross written and earned premiums within the segment were up 5% for the first 9 months of the year.
Premium growth was driven by higher premiums in our general liability and professional liability lines from both new business and higher renewals due in part to more favorable rates, along with the impact from favorable premium adjustments in our general liability and credit and surety lines. This growth was partially offset by lower premiums in our property and workers' compensation lines due to Non-renewals.
Our property line continues to run off as part of our catastrophe strategy with the transition of our reinsurance property line to Nephila and the decision to discontinue writing retro property business within our underwriting operations. The reduction in workers' compensation was due to the Non-renewal of a large quota share treaty in the first 1/4. The combined ratio for the first 9 months of the year within the reinsurance segment was 93% versus 108% a year ago.
The current year combined ratio included $15 million or 2 points of net losses from the Ukraine war, compared to $93 million or 12 points of net losses last year related to 2021 catastrophe events. The transition of our reinsurance property lines and the exit of retro reinsurance lines resulted in reduced volatility, which significantly benefited our reinsurance segment's underwriting results.
Excluding the impact from these events, the reinsurance segment combined ratio decreased by five points from a year ago, primarily due to favorable development on prior accident year losses this year versus adverse development last year. The segment had 2 points of favorable loss development this year due to favorable loss development in our credit, and surety, and property product lines, partially offset by the impact from favorable prior year premium adjustments.
Last year, the segment was impacted by 4 points of adverse development, primarily within our property product lines, including 3 points of adverse development related to losses attributed to COVID-19. We continue to make progress towards our combined ratio target of 90%. Excluding cat and specific events, Year-To-Date, we're sitting at a 91% versus a 93% a year ago.
Significant efforts made by Jed Rhoads and our reinsurance team around Re-Underwriting our reinsurance portfolio are starting to show through in the financial results. As we announced last 1/4, Jed is gonna be retiring at the end of the year after an incredible 40+ years in the reinsurance industry. We thank him for all of his contributions to Markel, including successfully repositioning our global reinsurance operations for sustainable, profitable growth.
Next, I'll talk to you on our program services and other fronting operations and our ILS operations, both of which are reported as part of other operations. As a reminder, almost all of the gross written premium within our program services and other fronting operations is ceded.
Our program services and other fronting operations continue to grow with total premium production of $2.6 billion this year versus $2.3 billion last year, and produced total revenues of $105 million this year, up 18% from a year ago. Margins in this area of our business remain strong, as does our new business pipeline. Within our Nephila operations, operating revenue from the year were down versus last year, due primarily to the disposition of our Velocity MGA operations in February.
We recognized a gain of $107 million in the first 1/4 of this year associated with that transaction. Further, we finalized the sale of our Volante MGA in October for an estimated cash consideration of $155 million, the gain from which will be recognized in our fourth 1/4 results. Nephila's assets under management were $7.8 billion as of September 30, 2022.
While Hurricane Ian had a significant impact on investor returns, the estimated losses were consistent with Nephila's expectations for an event of this magnitude. Nevertheless, the significant Ian loss and investor fatigue around recent cat activity will continue to adversely impact assets under management. I'll end with a few comments about market conditions and outlook as we look to finish the year strong.
As I think everyone knows, we are currently transitioning leadership of our insurance engine over to Jeremy Noble, and he and I will be happy to take questions during Q&A. As I noted earlier, and as noted on many of our peers' earnings calls, rates continue to gradually moderate in most lines. Exceptions continue to be cat-exposed property in lines such as aviation, terrorism, war, and political violence, which has been impacted by the Russo-Ukrainian war and other large events, including Hurricane Ian.
We continue to see strong submissions, new business opportunities, and total premium writings despite uncertain financial markets and fears related to a potential economic slowdown. Inflation in all its forms continues to be a significant focus for us and the industry. As I discussed last 1/4, going into 2022, we'd already baked more inflation into our pricing and loss reserving.
During the third 1/4, we adopted an even more cautious approach, which impacted both our prior accident year reserve releases and our current accident year loss picks. As has always been our philosophy, we will respond quickly to potential adverse trends and will be slow to recognize positive trends until they can be confirmed.
Most of our products' pricing bases are impacted by inflation, and this helps to some extent to offset claims trend. However, we are not prepared to rely on this to maintain rate adequacy. While overall market conditions remain favorable, we have been disappointed to see more price competition in certain lines of business. We see absolutely no justification for price decreases given all the risk factors we have previously discussed.
We are gonna continue to push for what we believe are must-have rate increases, and we are prepared to walk away from business that is not adequately priced. Fortunately, we feel we're well-positioned to both act with discipline and grow profitably, given our broad product diversification and market-leading capabilities.
Interestingly, we find ourselves at the end of the third 1/4 this year in a remarkably similar position to 2021. We need a strong finish to the year to achieve our profitability goals of a 90% combined ratio or better. We know our team will continue to work hard in pursuit of this goal. Thank you for your time today, and now I'd like to turn it back over to Tom.
Thank you, Richard. I hope that I conveyed my optimism and gratitude for how all three of our engines are firing these days and our overall circumstances at Markel in my opening comments. I think the best I can do at this point is just to open the floor for questions. With that, Regina?
We will now begin the question-and-answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star one again. At this time, we'll pause momentarily to assemble our roster. Our first question will come from the line of Mark Hughes with Truist. Please go ahead.
Yeah, thanks. Good morning. I wonder what you can say in terms of signals you're getting about the economy when you look at your insurance operations, also the ventures. You say construction is doing pretty well. I'm curious whether you're seeing any kind of signs that things may be slowing.
Yeah. Thanks, Mark. It is of incredible value to have the windows that we have, both through what each individual underwriter would see and what we see through the various businesses that we're in across the economy. What I'll tell you is, it's hard and it's challenging, and every single business is dealing with labor issues, supply issues, and inflationary pressures. At the same time, we continue to increase prices in response to increased costs, and there's plenty of business to be done. It keeps on keeping on.
Very good. How about, when you look at the reinsurance segment, obviously cat exposed property is hardening up. Is that spilling over into other lines? Is that going to create opportunity within reinsurance or insurance, the insurance segment as well?
Hey, Mark, it's Jeremy. Maybe I'll start on that. I think you're right to point out, and there's property is certainly part of the story. I think marine and aviation lines because of this year's events are also part of the story. You know, we see it if we're on the table relative to our outward programs, and we see it where we're at the table from our inward programs.
The conversations are definitely a little more tense, and I think capacity is a little more scarce, and I think that is creating a little bit of a firming opportunity. I would anticipate that has broader implications across casualty and specialty lines, as well. We're gonna see and learn a lot more, I think, in the next few months.
You know, we've seen a little bit of a gap differential over the last couple of years between how sort of the primary insurance space is working and the reinsurance space. I would say it is certainly hardening more right now in the reinsurance space.
When we think about your growth in insurance at 21% in written premiums this 1/4, I hear your description of some pockets of price competition. You're being careful about inflation. You also say the pricing increases are moderating, but you're still seeing, in looking at the written premium growth, that you're seeing a lot of good opportunity. Any way to kind of square all of that, the optimism in the P&L versus the caution in the language and description here?
I think the way to square it is, you're right, Mark. You know, things are good. Language and the way we speak, we're inherently conservative people. We always have been, we always will be. We never want to take things for granted. We never wanna just sugarcoat things, but things are pretty good. Jeremy. I'll add to that.
I think this is a demonstration of the work that we've been hard at across our insurance operations for quite some time. I think we benefit from broad product diversification, global capabilities, strong trading relationships, a multi-distribution platform. We are achieving rates. We got new product innovation. That's allowing us to grow. But what we're laser-focused on is growing profitably.
At the same time, I think we have the ability to act with a high degree of discipline. That squares comments about the importance around rate adequacy, the importance of, discipline, the importance of knowing when we got to push away from the table or put the pen down with the opportunity for us to grow, at present as well as what I think that portends for future quarters. That's what we've been hard at work at.
Understood. Thank you.
Our next question will come from the line of Mark Dwelle with RBC Capital Markets. Please go ahead.
Yeah, good morning. Let me start with an accounting question. The $53.4 million of reserve release that related to CatCo, am I correct understanding that you guys were effectively just a pass-through for that? It passed through one line and then back out through the minority interest. Was there any other, you know, plus or minus that was caught up somewhere else in the results that may not have been obvious?
Hey, Mark, it's Jeremy. Well, you'd make a great accountant. Yeah, you're exactly right. It's really just geography. That is a straight Pass-Through. You know, we continue to wind down the reserves. We continue to execute computations where we can. Where there are savings, that passes through to the benefit of the original investors. We see that, the sort of benefit come through as a favorable in the other expenses. The offset is a Non-Controlling interest, kind of below the line. Just be aware of that.
Right. Okay. My old accounting professor would be proud that I retained any of that. Anyway, the second question that I have, and this may be probably for Jeremy and Richard. I mean, you've talked about your increasing caution on the reserving and on the loss picks. You know, yeah, we've got some pretty decent pricing still, and we obviously have inflation.
Can you just talk kind of for year to date, we're still an improved accident year margin. Can you just talk about kind of the evolution of your thinking on that over the course of the year? You know, I guess all else equal, I mean, I guess it could have been better had inflation not been as severe as it's been. Is that the right way to think?
Yeah, Mark, I'll start and maybe Richard l will jump in. I think that is a good way to think, and we'll necessarily get into numbers or certainly a Line-By-Line view. You know, overall, I think we feel that rate and underwriting actions are keeping just ahead of trend. That expands to our acknowledgement that in an inflationary environment, you know, exposure has an effect of acting like rate to a certain degree as well.
That is why we are incredibly focused on rate adequacy. If we weren't in an elevated inflationary environment, without a doubt, the results would even be stronger. I think you know us well, and Rich, you touched upon this earlier. We have a very long-standing philosophy with regards to how to approach reserves.
Focused on more likely redundant than deficient, focused on reacting to bad news, if you will, very quickly, and taking a much more measured view to good news. That's anywhere over time where we are in a cycle, but I think that's even more so the case now. I feel like despite an inflationary environment, right, we can take those actions that Richard and I were mentioning.
We can still generate favorable prior year development. We can, in fact, maintain or improve our confidence in our loss reserves, and we can still generate, you know, certainly on an ex-cat basis, a combined ratio of 90 or better. That's a pretty good place, I think, for us to be at this stage.
Yeah. I'll just add, Mark.
Is that a-
Just real quickly, Mark, I'll just add. You know, it's been a while since anybody has seen, you know, inflationary pressures like the ones we've seen recently. You know, we're having to kind of reeducate underwriters, actuaries, accountants, everybody. I mean, you know, Tom and I have seen this kind of inflation, but a lot of the rest of the people around here have not. It's safety first at Markel, and it always has been that way in terms of the reserves.
You know, we're more than happy to make sure the reserves are at the confidence level that we want, and if that means there's potentially some reserve decreases down the road, that's great. I think that's how we're trying to view this current situation.
I appreciate those comments. I guess with that in mind, it kind of raises two maybe follow-up questions directly to that point. If you're kind of at conservative plus in terms of thinking about, you know, accident year picks and reserving, what are the signposts you're looking for that would move you back to just, you know, merely conservative? That would be the first question.
Then the second, I mean, as you weigh up the pricing environment now, the inflationary trends that you're seeing, you know, would it still be the case that more likely than not accident year margins would improve next year, or you're not willing to go that far?
Yeah. I think it's hard to say whether accident year or margins improve because we got a lot of unknown variables, right? We don't know what the rate increases are gonna be next year, and we also don't know what the true rate of inflation is. I know you're gonna hate this answer, but the true thing that we need to be able to start potentially reducing our loss picks and increasing prior year releases is time. We need to see it. I think it's just a matter of time, and given current risk factors, I think it will take more time.
Yeah. I'll jump in, Mark, with some formal accounting comments here. Do you remember the movie My Cousin Vinny? There was a scene in there where the character that was played by Joe Pesci was hustling some pool, and he got into a little bit of a match with some of the locals there, and they wanted to bet. He said, "Well, where's your money to back up that bet?" He asked them to show them the cash of the stakes that they wanted to bet for. Of course, they didn't have it. It was a recurring riff, and they came back, and they had a big wad of money.
He says, "Well, how do I know that isn't just, you know, a bunch of ones with a 20 wrapped around it?" It turned out that's exactly what it was. Well, the good news when we're debating and trying to think about how this reserve, how reserves might develop over time, remember, we did collect the premiums up front.
We do have the cash for what we're talking about. Now, we'll see how they develop over time, but we do hold the cash, and we are investing the cash at higher and higher rates of return. We continue to operate with the belief that we want our reserves to be more likely to be redundant than deficient. We have the cash while we're waiting for, as Richard said, time just to say, "The claim is settled, it's done.
We know. In the meantime, economically, we're earning the returns from Markel.
Okay, thanks for that. I think that's the first in 20 years of doing this, that's the first My Cousin Vinny reference I've ever gotten in response to a question that I've asked. That way, I won't have to ask you whether the, if Markel is a pizza, if you're a New York style or Chicago style. I think you've shown your colors on that one.
I don't know, but I know what we're eating for lunch now.
Yeah, thanks for those. I'll let others jump in.
Again, if you have a question, please press star then one. Our next question will come from the line of John Fox with Fenimore Asset Management. Please go ahead.
Yeah, good morning, everyone. First, congratulations on the reinsurance results. I have a number of questions for Tom. Tom, you've been holding on to about $2 billion of short-term investments for quite some time. Another $3 billion in cash. There's been no opportunity cost for doing that. But today there is.
Although Short-T erm rates, you can make a, you know, decent return. Can you talk about the opportunity cost today? Would you invest some of that cash in short-term investments and increase the yield going forward?
Well, the good news is, while there's a lot of chatter and conversation about that issue over the last year or so, with hindsight, in retrospect, you know, it looks like a pretty good decision. The rates of return on that cash are going up, and we are deploying it, as we talked about in terms of buying equities and repurchasing our own stock.
Given the profitability, the capital position, what we'll do is to continue to invest it in a methodical and disciplined way. I'm not gonna chuck it into the market all at once. We'll do the same thing we always do, just steady, incremental, iterate to a better and better return.
Right.
I have no market forecast. I have no crystal ball. We're putting the money to work.
Yeah, I guess $2 billion in short-term investments, right? Could that be $1.5 billion and $600 million of corporates where you could earn 5%-6% on pretty short duration? Like, are you thinking about that? Or you-
We're moving towards it.
You know we're doing 4-4.5% on short-term, and that's okay.
Yeah. It's not awful, especially compared to what it has been.
Okay. That's very clear. Thank you.
Yeah, John, I can recall a conversation with you many, many years ago where you made the comment about Markel Corporation. They may not always do what you want them to do, but they will always do what they say they will do. You and I are in agreement, and we might pace it a little differently than you would if our roles were reversed, but we're doing the same thing.
Your answer is very clear. Thank you. The other point on investment income, sometimes on these calls we get an interesting lecture on accounting, and I would say that. I'd like your reaction to this. I think your net investment income is actually doing better than you suggested. If I read the K, the Q correctly, the $108 million of net investment income includes about $5 million of marks from Hagerty.
Yeah. I think it's actually more than that. The equity method investing, and believe me, that's one of those sentences that starts around here with, "I used to be an accountant, and..." Those conversations never occur. Yes, both. I mean, for instance, there was one investment that we made, probably 10 or 12 years ago. I cannot recall with precision whether it was $25 or $50 million, but it was one of those two numbers. I think we've recognized cumulative gains and losses of well over $100 million each way of gains and losses.
Right
Over time, depending on the mark to market that 1/4. It's the same thing that happened when we wrote a credit default swap, that we ended up having a wonderful experience with a long time ago. The quarterly swings that come through equity method accounting do indeed obscure what's really happening in fundamental economics.
You're reading the Q right, and that's why I use the new term of recurring net investment income this year. I think for the first 9 months, the number is about $50 million in total on the equity method thing. So if you took that out of the mix and looked at recurring net investment income, it is going up at a faster rate than what was reported in this 1/4's results.
Hey, John, it's Jeremy.
Yeah.
John, it's Jeremy. Just to piggyback off Tom's comments. All of our equity method investments are included in that line item. It's not just Hagerty. I wanna sort of make that point.
Right.
Tom's exactly right. The Year-Over-Year shift is $50 million. Instead of on a 9-month basis being down $10 million, we'd be up $40 million, Year-Over-Year.
Right. That's my point. Right.
Yep, exactly.
The recurring investment income from the portfolio is growing and increasing the return on equity. Is that the right way to think about it?
Yes.
To add insult to injury on the Hagerty piece, it's worth about half a billion dollars more than what's on the financial statements, right?
That is correct.
Okay. Thank you. For Tom-
To that point, John, call it half a billion dollars. The only thing we've ever recognized are losses.
Right. Okay. Tom, final question for you. On the Ventures side, if I look at the products. I take the products revenue and subtract the expenses, it's about a 1% margin, which is, I'm sure, not reflective of reality. Could you talk about anything that went on there in the third 1/4? Is there anything unusual or is that seasonality?
Yeah. I don't know. I know one of the things that would be going on in terms of the EBITDA profitability of the book and the set of businesses is, you know, to the extent that we have distribution businesses, those are high volume, low margin, but they're wonderful return on capital. The mix is skewing a bit that way at the moment. I have to look at and think about the exact thing you're asking about. Don't know.
Okay, great. Thank you. Richard, for you, typically ILS has had a big fourth 1/4. You know, that's been their best 1/4 for profitability, I guess, as things get trued up from the investment year. Do you expect that to happen again this year? Or with the hurricane, is that off the table?
You know, I guess I have to say, John, I don't know.
Right.
The fourth 1/4 is usually when you look hard at the side pockets and see if they can be released, and that releases trapped fees. I don't know where that will stand this year, just simply because of you know, like you say, Ian. I think there's gonna be quite a bit of focus on making sure you get reserves correct for Ian. Also, in terms of this is the time that you do capital raising. I guess, sorry, the answer is I don't know.
Okay. That's fine. I appreciate it. Thank you everyone.
Thanks.
This concludes our question and answer session. I would like to turn the conference back over to Tom Gayner for any closing remarks.
Thank you for joining us. Be well. We'll talk to you again in about another 90 days.
The conference call has now concluded. Thank you for attending today's presentation. You may now disconnect.