Markel Corporation ( MKL)

Q3 2011 Earnings Call

November 8, 2011 10:30 a.m. ET

Executives

Tom Gayner - President & CIO

Anne Waleski - VP, CFO & Treasurer

Richie Whitt - President & Co-COO

Analysts

Vincent DeAugustino – Stifel Nicolaus

Mark Dwelle– RBC Capital Markets

Jack (Schrack) – Suntrust

Wendy Hauser-Martel Corporation

Presentation

Operator

Greetings and welcome to the Markel Corporation third quarter 2011 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, Tom Gayner, Chief Investment Officer for Markel Corporation. Thank you. Mr. Gayner you may begin.

Tom Gayner

Thank you, Devin, good morning. It is my pleasure to welcome you to the Markel Corporation's third quarter conference call. Thank you for joining us.

On today's call we will follow our normal line-up with Anne Waleski leading up with the financial results, followed by Richie Whitt with operational comments. Mike Crowley is unable to join us today, so Richie will share and cover his comments. Then I will discuss our investing and non-insurance activities.

After everyone’s comments, we’ll be all available for your questions. Before we begin, I am duty bound to remind you that during today's 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 quarterly report Form on 10-Q.

We may also discuss certain non-GAAP financial measures in the call today. You may find a reconciliation to GAAP of these measures on our website at www.markelcorp.com in the Investor Information section under non-GAAP reconciliation or in our quarterly report on Form 10-Q.

With that, Anne.

Anne Waleski

Thank you, Tom, and good morning everyone. I plan to follow the same format today as in prior quarters. I will focus my comments primarily on year-to-date results. I will start by discussing our underwriting operations followed by a brief discussion on our investment results and bring the two together with a discussion of our total results for the nine months.

So moving right into the underwriting results, gross premium volume was just under $1.8 billion for the first nine months of 2011, up 16% compared to 2010. This increase was due to higher gross premium volume in the Specialty Admitted in London Insurance market segment.

As of September 30, 2011 the Specialty Admitted segment included $170 million of gross written premium from our FirstComp workers’ compensation operations, which we acquired in late 2010. The increase in gross written premiums in the London Insurance market segment was due in part to an increase in premiums written by Elliott Special Risks, which been converted from an MGA operation to a risk bearing insurance division.

We also saw significant increases in premium volumes within our Marine and Energy division due in part to offering large loan sizes and an improved pricing environment.

Net written premiums were approximately $1.6 billion, up 15% to the prior year. Retentions were down slightly at 89% compared to 90% in 2010. Earned premiums increased 16%, primarily due to the higher earned premiums in the Specialty Admitted in London market segments as a result of higher gross premium volumes compared to 2010. This Specialty Admitted segment included $147 million of earned premium from FirstComp.

Our combined ratio was 105% for the first nine months of 2011 compared to 99% in 2010. The increase was due to a higher current accident year loss ratio, partially offset by more favorable development of prior year’s loss reserves compared to 2010.

The combined ratio for the first nine-months of 2011 included $133 million or 9 points of underwriting loss for natural catastrophes including the Hurricane Irene during the third quarter, the U.S. storms in the second quarter and the Australian floods, the New Zealand earthquake and the Japanese catastrophe, all of which occurred in the first quarter.

Our 2010 combined ratio included $17 million or 1 point of underwriting loss related to the Chilean earthquake. The 2010 combined ratio also included $72 million or 6 points of underwriting loss on two programs now in runoff that were due to losses associated with the adverse conditions in the residential mortgage market.

Favorable redundancies on prior year’s loss reserves increased to $250 million or 17 points of favorable development compared to $181 million or 14 points of favorable development in 2010. The increase was primarily due to more favorable development of prior year’s losses in the Excess and Surplus Lines segment.

Our 2011 year-to-date expense ratio was flat to the same period in 2010.

Turning to our investment results next. Investment income was $197 million for the first nine-months of 2011, compared to $201 million in 2010. Net realized investment income included an adverse change in the fair market value of our credit default swap of $2.7 million. Net realized investment gains were $25 million compared to $22 million in 2010.

Unrealized gains decreased $31 million before taxes in 2011 due to a decrease in the fair market value of our equity securities, partially offset by an increase in the fair market value of our fixed maturities. Tom will go into further details in his comments.

Looking at our total results for the first nine months of 2011, we reported net income to shareholders of $92 million compared to $127 million in 2010. Book value per share increased 2% to $333 per share at September 30, 2011, up from $326 per share at December 31, 2010.

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