Markel Corporation's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Markel Corporation (MKL)

Q2 2012 Earnings Call

August 9, 2012 10:30 AM ET

Executives

Tom Gayner – President and Chief Investment Officer

Anne Waleski – VP and CFO

Richie Whitt – President and Co-COO

Mike Crowley – President and Co-COO

Analysts

Mark Hughes – SunTrust

Jay Cohen – Bank of America

Dave West – Davenport

Scott Heleniak – RBC Capital Markets

Ron Bobman – Capital Returns

Meyer Shields – Stifel, Nicolaus

Adam Klauber – William Blair

Presentation

Operator

Greetings and welcome to the Markel Corporation Second 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, Mr. Tom Gayner, President of Markel Corporation. Thank you, Mr. Gayner. You may begin.

Tom Gayner

Thank you, Manny. I appreciate it. Good morning and welcome, everyone, to the Markel Corporation’s second quarter conference call. We’re pleased that you’re joining us as we all look forward to sharing the good news of our substantial year-to-date progress in 2012 and building the value of your company.

Over the past several years, we’ve been telling you about the transformation underway at Markel. We’ve told you about the growth of our insurance operations through entry into new geographical areas, our new products, and our acquisitions. We’ve told you about our focus on improving the operating efficiencies in our business and how we’ve restructured the company to increase our revenues from existing customers.

We’ve also told you about our expanded investment activities through Markel Ventures which now owns controlling interests in about a dozen profitable manufacturing and service businesses. We’ve told you about how Markel has more ways and more flexibility to create value for our shareholders than ever before and it is now delightful to begin to show you the fruits of these efforts, rather than just telling you about them.

As is our custom, our Chief Financial Officer, Anne Waleski, will lay out the overall numbers from the first half. Then, my Co-Presidents, Mike Crowley and Richie Whitt, will discuss our domestic and international insurance activity. I will then cover our investment in Markel Ventures operations, and then we will open the floor for your questions.

Before getting started with today’s lineup, though, the rules say 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 as described under the captions Risk Factors and Safe Harbor and Cautionary Statements and 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’ and our quarterly report on Form 10-Q.

With that, Anne?

Anne Waleski

Thank you, Tom, and good morning, everyone. Before I get to a discussion of our financial results, I will point out a couple of accounting items new to the quarter and the year. First, I’m sure you have all noticed some changes in our statements this quarter.

Redeemable non-controlling interest is a new line item on the balance sheet this quarter. For all periods presented, we have reclassified amounts previously included in the non-controlling interest balances for relevant Markel Ventures affiliates to this new line item. This is required because some of the Markel Ventures’ minority shareholders have the option to sell their shares to us in the future generally at a fixed multiple of EBITDA.

In addition to the reclassification, there is an adjustment recorded on these redeemable non-controlling interest balances. As of the end of each reporting period, the carrying value of the redeemable non-controlling interest is adjusted to the calculated redemption value if that price is higher than the current carrying value. The purpose of the adjustment is to record the potential cash obligations we may have to the non-controlling interest shareholders.

This quarter, redeemable non-controlling interest balances were marked up by $8.2 million. The adjustment is recorded to retained earnings and reduces net income to shareholders when calculating earnings per share. You can find the earnings per share calculation in Footnote 2 and additional information regarding our contingent obligations to the non-controlling shareholders in Footnote 8.

The second item I would like to point out was previously discussed in our first quarter conference call and filings, but I’d like to remind everyone that we chose to prospectively adopt the new DAC accounting standards. As of June 30th, 2012, we have recognized approximately $35 million or 3 points of expenses related to the prospective adoption of the new standards.

Now that we have covered these new items, I will review the 2012 financial results. I will follow the same format in discussing results as in past 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.

Our total operating revenues grew 12% to $1.4 billion in 2012 from $1.3 billion in 2011. The increase is due to a 10% increase in revenue from our insurance operations and a 30% increase in revenue from our non-insurance operations which we refer to as Markel Ventures.

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