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Markel Corp. Q2 2010 Earnings Call Transcript

Markel Corp. Q2 2010 Earnings Call Transcript

Markel Corp. (MKL)

Q2 2010 Earnings Call

August 9, 2010 10:30 AM ET


Steve Markel – Vice Chairman

Richie Whitt – Co-President and Co-Chief Operating Officer

Anne Waleski – Chief Financial Officer

Tom Gayner – Co-President and Chief Investment Officer and President, Markel Ventures


Amit Kumar – Macquarie Bank

Beth Malone – Wunderlich Securities

Mark Hughes – SunTrust Robinson

Michael Nannizzi – Oppenheimer

Jay Cohen – Bank of America

Mark Dwelle – RBC Capital Markets

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Meyer Shields – Stifel Nicolaus

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Greetings. And welcome to the Markel Second Quarter 2010 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve Markel, Vice Chairman for Markel. Thank you, Mr. Markel. You may begin.

Steve Markel

Thank you. I appreciate everybody joining the Markel conference call today. During our call, we may make forward-looking statements. Additional information about factors that could cause actual results to differ materially from those projected in the forward-looking statements is described under the captions Risk Factors and Safe Harbor and Cautionary Statement in our most recent annual report on Form 10-K and on quarterly report Form 10-Q.Our quarterly report, Form 10-Q, which is filed on our website a, also provides a reconciliation to GAAP of certain non-GAAP measures which we may be discussing in our call today.

The second quarter and six months of 2010 is off to a pretty good start. We were disappointed to report underwriting loss in the six-month period of time of 102%. 4 points of this is related to the Chilean earthquake and the Deepwater Horizon oil rig loss.

However, it is probably more important to note that pricing is still very, very weak in the property and casualty insurance sector and we, as everybody else in the marketplace, is struggling to get appropriate levels of price increase.

The good news is that book value increased 3% at June 31st to $291.71, up from $282 at the end of the second quarter. Additionally, we have two other events that occurred in the quarter that I think are very important to note. First, we announced a couple of weeks ago our agreement to purchase Aspen Holdings and FirstComp insurance group, which we hope will close in the fourth quarter of the year.

Aspen and FirstComp write approximately $300 million of Specialty workers’ compensation insurance through 9000 retailers in 31 states. This transaction will significantly increase the size and scale, and scope of our Specialty unit, where we market Specialty insurance products to retail insurance brokers. And we are hopeful not only to expand our workers’ comp writings in more states and through other relationships within the Markel organization.

But we are certainly hopeful to creating and delivering new and different Specialty products to these 9000 agents of Aspen. So we are very, very excited about that. I think it is going to be a very, very favorable move for Markel and creates a little bit of enthusiasm to do something new and exciting.

Additionally, in May, shortly after our shareholders’ meeting, we announced some executive management changes. Richie Whitt, Tom Gayner and Mike Crowley became Co-Presidents of Markel. Additionally, Anne Waleski was promoted to the Chief Financial Officer.

So on today’s call, our lineup will be slightly different. After, well, in about two seconds, I’ll introduce Anne Waleski, our Chief Financial Officer. She will be followed by Richie Whitt, our new Co-President, to talk about operations, and Tom Gayner, Co-President and Chief Investment Officer and President of Markel Ventures, to talk about our investment activities. I’ll follow it up to moderate the questions and answers. Anne?

Anne Waleski

Thank you, Steve, and good morning, everyone. I will follow the same format that Richie has in past quarters. I will focus my comments primarily on year-to-date results. I’ll start by discussing our underwriting operations, followed by a brief discussion of our investment results and bring the two together with a discussion of our total results for the six months.

Moving right into the underwriting results, gross premium volume was up 1% at $1 billion for the first six months of 2010. Higher gross premium volume in the London Insurance market segment, which was due in part to our acquisition of Elliott Special Risks in late 2009, was partially offset by continuing competition across many of our product lines, particularly within the excess and surplus lines segment.

Net written premium was also up slightly to the prior year at $900 million. Retentions were at 89% compared to 90% in the prior year. Earned premiums decreased 9%, compared to 2009 due to lower gross and net written premiums over the past several quarters. Our combined ratio was 102% for the first half of 2010, compared to 97% in 2009.

The 2010 current accident year loss ratio was 71%, compared to 69% in 2009. The increase is due in part to losses from the Chilean earthquake and the Deepwater Horizon drilling rig explosion, which resulted in $33 million or 4 points of underwriting loss in the first six months of 2010.

Favorable redundancies on prior year’s loss reserve decreased to $75 million or 9 points of favorable development, compared to $94 million or 10 points of favorable development in 2009. The decrease was primarily due to less favorable development of prior year’s losses in the London Insurance market segment.

Our 2010 expense ratio increased approximately 2 points to 40%. The increase in the expense ratio is primarily the result of lower earned premium and higher profit sharing costs compared to the same period last year. Costs related to our One Markel systems project, also referred to as Atlas, represent approximately 2 points on the combined ratio in both periods.

Turning to the investment results, investment income was flat to 2009 at $133 million due to lower interest rates, which were offset by a larger portfolio. Realized gains were $13 million, compared to $71 million of realized losses in 2009. The majority of the 2009 losses related to write-downs for other than temporary declines in the fair value of equity and fixed securities.

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