Markel's Management Discusses Q1 2012 Results - Earnings Call Transcript

Markel Corporation (MKL)

Q1 2012 Earnings Call

May 10, 2012 10:30 am ET

Executives

Tom Gayner - President

Anne Waleski - Chief Financial Officer

Mike Crowley - Co-President

Richie Whitt - Co-President

Analysts

Mark Hughes - Suntrust

Scott Heleniak - RBC Capital Markets

Meyer Shields - Stifel Nicolaus

John Fox - Fenimore Asset Management

Presentation

Operator

Greetings and welcome to Markel Corporation's First Quarter 2012 Earnings 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. Thank you. Mr. Gayner, you may begin.

Tom Gayner - President

Thank you so much. Good morning and welcome to the Markel Corporation 2012 first quarter conference call. We are glad that you are joining us and we look forward to your thoughtful questions about our business.

As is our custom, our Chief Financial Officer, Anne Waleski, will layout the numbers from the first quarter, followed by my Co-President, Mike Crowley and Richie Whitt, would comment about our international and domestic insurance operations. I will then discuss our investment and Markel ventures operations a bit, and then we will open the floor for questions.

Before getting started, the rule says we need to repeat the Safe Harbor statement. So here it goes.

During our call today, 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 Statements in our most recent Annual Report on Form 10-K and Quarterly Report on Form 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 - Chief Financial Officer

Thank you, Tom, and good morning everyone. I plan to follow the same format as in prior quarters. I will 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.

I am pleased to say that for 2012 we are off to a good solid start. Total operating revenues grew 18% to $733 million in 2012, up from $622 million in 2011. The increase is due to a 15% increase in revenues from our insurance operations and a 43% increase in revenues from our non-insurance operations, which we refer to as Markel Ventures.

Moving into the underwriting results, first quarter 2012 gross written premiums were just under $650 million, which is an increase of 10%, compared to 2011. The increase in 2012 was due to higher gross premium volumes in each of our three operating segments. Net written premiums were approximately $580 million, up 12% to the prior year. Retentions were up slightly in 2012 at 90% compared to 88% in 2011. Earned premiums increased 14%. This increase was driven by a 23% increase in earned premium from the London Insurance Market segment.

First quarter 2011 net written and net earned premiums for the segment were reduced by approximately $9 million of reinsurance cost, associated with losses incurred during the first quarter a year ago.

Our combined ratio was 100% for 2012, compared to 112% in 2011. The combined ratio for 2012 includes $20 million or 4 points of expense related to our prospective adoption of the new GAAP accounting standards. The 2011 combined ratio included 15 points of underwriting losses related to the three catastrophe events, which occurred last year in Australia, New Zealand, and Japan. Excluding the impact of the prospective adoption of the new GAAP accounting standards in the first quarter of 2012, and the effect of the catastrophes in the first quarter of 2011, our combined ratio improved by 1 point. This improvement was due to a lower expense ratio and a lower current accident year loss ratio, partially offset by less favorable development of prior year's loss reserve. The improvement in the expense ratio is primarily due to an increase in earned premium. The improvement in the current accident year loss ratio was due to lower attritional current year losses in the Excess and Surplus line segment and to lower attritional and large energy losses in the London Insurance Market.

Favorable redundancies on prior year's loss reserves decreased to $64 million or 12 points of favorable development, compared to $75 million or 16 points of favorable development in 2011. The decrease is primarily due to less favorable development of prior year's losses in the Excess and Surplus line segment.

In the first quarter of 2011, we resulted significant portion of our outstanding liabilities associated with an Errors & Omissions program from mortgage servicing companies and as a result reduced loss reserves by $16 million.

Next I will discuss the results of our non-insurance operations, which we call Markel Ventures. In 2012, revenues from our non-insurance operations were $97 million, compared to $68 million in 2011. Net income to shareholders from our non-insurance operations was $200,000 in 2012, compared to $2.4 million in 2011. Revenues from our non-insurance operations increased in 2012, compared to 2011, primarily due to our acquisitions of Baking Technology Systems Incorporated and WI Holdings Incorporated in late 2011. The decrease in net income to shareholders from our non-insurance operations is a result of decreased shipments for the quarter in our manufacturing operations where we expect to see improvements as the year progresses.

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